When I last wrote about Alnylam (NASDAQ:ALNY) in April, Is Alnylam In 2020 Worth $9 Billion Now?, I made the case for the long-term triumph of Alnylam's RNAi (RNA interference) therapies. I also pointed to the dangers of investing in a clinical-stage biotechnology company with a high market capitalization. Since then, ALNY swooned with much of the healthcare sector. Volatility has been high, as shown in this chart:
After approaching $140 per share in June, corresponding to a market capitalization of almost $12 billion (84.6 million shares), the company hit a 52-week low of $71.14 per share, or a market cap of $6 billion, on October 21.
Since then, Alnylam has recovered a bit, closing at $104.44 on December 3, 2015, with a market cap of $9 billion. As I write on December 7, the stock is down substantially despite reports of good Phase 1 data on its hemophilia therapy Fitusiran (ALN-AT3).
Recent Data Supports The Benefits Of RNAi Therapies
The drop in price came despite positive new data from clinical trials. On November 11, ALNY, in collaboration with The Medicines Company (NASDAQ:MDCO), reported new data on ALN-PCSsc. The Phase 1 data confirmed the therapy could reduce bad cholesterol for 180 days after a single injection. Competing PCSK9 blockers that recently came to market by Amgen (NASDAQ:AMGN) (Repatha) and Regeneron (NASDAQ:REGN) (Praluent) last about a month and use monoclonal antibody technology. Alnylam's therapies are based on RNA interference, or RNAi. A Phase 2 trial of ALN-PCSsc is expected to begin in late 2015 or early 2016.
A meaningful bump in the Alnylam stock price will likely follow when the first FDA commercial approval seems more certain. That approval is not likely before 2018, but 2016 should have a number of catalysts. The first may be the completion of the Apollo Phase 3 trial of Patisiran for TTR-mediated amyloidosis (ATTR amyloidosis). Apollo is expected to complete enrollment in Q1 2016. Reporting completion of the enrollment will mean a more certain timeline for the results needed for FDA approval.
What other data should investors look for? Currently, Revusiran for familial amyloidosis is in the ongoing Endeavor Phase 3 trial. This differs from the Patisiran Apollo Phase 3 trial in that the target diseases for Revusiran is FAC (C as in cardiomyopathy), as contrasted to Patisiran treating FAP (P as in polyneuropathy). The timeline for data is currently uncertain, but should become available in 2016.
The entire ALNY pipeline and platform will be valued more highly by investors if these trials report positive data, though that is not likely before 2017. Barring market weirdness or negative clinical trial results, ALNY will likely break through the $140 per share, its previous all-time high barrier some time in 2016 as investor confidence grows. By that point, the versatility of the platform for creating new therapies and the size of the pipeline will be taken as a given. Individual therapies may fail in clinical trials, but the basic assumption is that the platform can generate a string of winners.
One good way for investors to think about Alnylam's pipeline is that the therapies are upstream of today's standard (and quite successful) new therapies, monoclonal antibodies. The standard paradigm is that the genes, composed of DNA, get converted to proteins, which function, or fail to function if they are defective. Monoclonal antibodies can tackle specific proteins that cause disease. RNAi is upstream because RNA is the transfer mechanism that moves genetic information from genes to the protein-making machinery. RNAi blocks the RNA transfer mechanism so that the unwanted proteins never get made.
Potential Catalysts: The Rest Of The Pipeline
Although it is all in preclinical or early stages (typically Phase 1), the rest of the pipeline is broad. Additional therapies already in the clinic are ALN-CC5 for paroxysmal nocturnal hemoglobinuria and ALN-ATT for antitrypsin deficiency liver disease.
In preclinical development, there are therapies for primary hyperoxaluria, beta-thalassemia, hyperlipidemia, hepatitis B, hepatitis delta virus, and chronic liver infection. The hepatitis B link explains how RNAi can prevent the virus from replicating in a human cell, or at least in a rat cell.
Of these, I would highlight ALN-AT3 for hemophilia, currently in a Phase 1 study, because Genzyme has taken an option for commercialization outside the U.S. and Europe.
Also notable is that ALN-AS1 for acute hepatic porphyrias reported positive clinical data from the initial phase of the ongoing Phase 1 trial. Results support a monthly or perhaps quarterly dosing regimen.
The technical problems that need to be overcome with RNAi therapies can be true of any drug: they need to get to where they are effective (inside cells producing unwanted proteins). That has to be done without unwanted side effects. So one thing to watch with the Patisiran, Revusiran and other trials are the side-effect profiles, which have been acceptable so far.
Cash And Runway
At the end of Q3, Alnylam had $1.34 billion in cash and equivalents, demonstrating investor confidence in the eventual profitability of the platform. Management expects to end 2015 with over $1.2 billion of cash, which makes sense given that operating expenses were only $85 million in Q3. Even if the spend intensifies to $100 million per quarter as the new trials start, Alnylam's cash runway should last until the end of 2018, by which time it may have its first commercial approval and revenue. Nevertheless, any delay could require raising further capital and resulting dilution.
Risk Vs. Reward
I believe the market is currently underpricing Alnylam because of the uncertainty about the timing of FDA approvals and the timing and size of future commercial revenues and profits. This is true, to some extent, for much of the biotechnology therapeutics group. It is important to understand that my view is based on long-term expectations. In the short run, the price could go in any direction, and any negative results from clinical trials can seriously hurt the price of the company that is still a few years away from commercial revenue.
Pricing of development-stage biotechnology therapy stocks can be remarkably subjective. So, honestly, in the short run, I see risks and rewards as relatively well balanced and largely subjective, so the only way to reduce risk is to buy on dips or sell on spikes. Analyst downgrades, whether merited or not, can be particularly damaging.
For long-term investors (time horizons of three years or more), the risks are more moderate, and the rewards should be high. Alnylam has a platform that can generate a very large number of therapies. The bottleneck is having resources to put the candidates through pre-clinical and then clinical trials. Once there is an approved therapy, the pipeline will likely be broadened further.
There is the risk that RNAi therapies will turn out to have a fundamental flaw, perhaps some toxicity not yet discovered, but I would rate that risk as small. A more important risk is the possible failure of the leading therapies, Patisiran and Revusiran. Since they are in Phase 3 trials, I would consider risk to be minimal because they are simply reproving the results of the Phase 2 trials on a larger scale.
So, if you can wait for the platform to evolve, the risk to reward ratio should be quite good. Keep in mind, however, that with a current market capitalization of $9 billion, there is a considerable assumption of profits already in the stock price. Using a P/E of 20 (my rule of thumb), the implied annual profit is already $450 million. As discussed above, while there is substantial cash at present, I believe that cash will basically be depleted by the time of the first commercial revenue.
I think the risks are similar, but the rewards are greater in a number of biotechnology stocks that have far lower market capitalization than Alnylam. One example would be GlycoMimetics (NASDAQ:GLYC), which just reported good data at ASH (American Society of Hematology), but which has a market cap of about $130 million. Then again, while GlycoMimetics has a platform, it has not yet generated many pipeline candidates, and those in clinical trials are not as advanced as Alnylam's.
Disclosure: I am/we are long ALNY, GLYC.
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.