Alnylam Basking In Orphan Drug Attention

By Stephen D. Simpson, CFA | May 28, 2013 AAA

It's been a pretty wild ride for Alnylam (Nasdaq:ALNY) shareholders, even by the elevated standards of biotechnology. Once thought to have the IP keys to one of the next great platform technologies (RNA interference), the stock was hammered down over several years as multiple Big Pharma companies chose to back away from the technology and partnerships with Alnylam. Since late 2011, though, it's been a return to investor love for Alnylam as positive clinical data and a bull market in biotech has fueled a fourfold rise in the shares.

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5x15 Means Multiple Shots On Goal
Alnylam has largely guided itself according to its “5 x 15” program, which is a focused and prioritized list of development candidates designed to have five products in clinical trials by 2015. While there are many promising targets for RNA interference (RNAi), Alnylam has chosen to focus its time and resources on largely orphan genetic diseases. There are not all that many people in the world with familial amyloid polyneuropathy, intermittent porphyria, or familial amyloidotic cardiomyopathy, but other biotechs like Alexion (Nasdaq:ALXN) and BioMarin (Nasdaq:BMRN) have amply demonstrated that there is a very worthwhile commercial markets in rare diseases with no effective treatment options.

Farthest along in the proprietary pipeline are two drugs for amyloidosis – TTR02 for familial amyloid polyneuropathy (FAP) and TTRsc for familial amyloidotic cardiomyopathy (FAC). TTR02 has shown encouraging early-stage results, but Phase II data (likely to be presented at the end of June) will be critical for the program and the stock. Likewise, while TTRsc is even earlier in development (currently in Phase 1 testing), data in mid-2013 is likely to garner significant attention.

Beyond this, the company has preclinical candidates for hemophilia (ALN-AT3) and intermittent porphyria (ALN-AS1) that it intends to get into clinical testing over the next 12 months. Other compounds for hemophilia and blood disorders like thalassemia and antitrypsin deficiency are also in preclinical testing, with the company ideally hoping to partner some of these prior to initiating Phase 1 testing.

Alnylam also has a candidate in the race for the next blockbuster cholesterol drug. ALN-PCS is a PCSK9 inhibitor, a class of drugs that has garnered significant attention from the investment community and drug companies like Amgen (Nasdaq:AMGN) and Sanofi (NYSE:SNY). Although Alnylam's Phase I data was encouraging, the company chose to partner the drug out to The Medicines Company (Nasdaq:MDCO) for further development, making it apparent that smaller scale orphan drug development is the company's preferred strategy for now.

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Orphans Getting Plenty Of Love Recently
In stark contrast to the implications of the name, orphan drugs have actually been getting a great deal more popular with investors and drug companies recently. As mentioned before, companies like Alexion and BioMarin (not to mention Sanofi's Genzyme) have found great commercial success with their orphan drug development programs.

Although these markets are, by definition, not large (typically fewer than 50,000 patients worldwide, and often fewer than 5,000), the diseases in question tend to be extremely serious (life or death) and with no effective current therapies. That combination has helped support eye-popping price tags for these drugs, often north of $200,000 a year.

But it's not just the prospect of lucrative reimbursement and various government-sponsored barriers to entry that make these markets appealing. As the patient populations are small, the trials tend to be small as well, which makes them cheaper to run and faster to enroll. What's more, the lack of therapeutic options often allows for drug developers to run relatively short trials where efficacy is established fairly quickly. Although the FDA still insists on clinical efficacy and acceptable efficacy/safety tradeoffs (as Pfizer (NYSE:PFE) learned when the FDA rejected its application for Vyndaqel in FAP), overall these drug development cycles are faster and cheaper.

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The Bottom Line
It is extremely early in the Alnylam story, and I frankly find all of the enthusiasm over Phase I results to be at least in part a symptom of the biotech bull market. That said, the company's IP is impressive and the preclinical and (very) early-stage clinical data from the company have been compelling. While I hate talking about “The next...” in reference to biotechs, the reality is that this company may be the next Regeneron (Nasdaq:REGN), Amgen, or Gilead (Nasdaq:GILD).

When valuing early-stage biotechs, a huge amount of guess work goes into the process. What's more, it's worth noting that somewhere between 85% and 90% of prospective new drugs ultimately fail. That said, I believe that TTR02 and TTRsc combined could be worth more than $28 per share today to Alnylam investors (with $1 billion in potential revenue for each drug, even with potential competition from a partnership of Isis (Nasdaq:ISIS) and Glaxo (NYSE:GSK)). With the same arguably being true for drugs for anemia, hemophilia, porphyria, and other blood disorders (to say nothing of licensing potential in other diseases), a price target of around $30 is not unreasonable today.

I do own these shares myself and I do believe in the potential of RNA interference as a platform technology in biotech/pharmaceuticals. That said, investors considering these shares today need to be aware of the very high risk involved – Alnylam is very early-stage, Big Pharma support for RNA interference has been inconsistent at best, and we are about three years into a strong biotech bull market. Still, for those investors shopping around for a potential platform company in biotech, Alnylam may be a name worth considering.

At the time of writing, Stephen D. Simpson owned shares of Alnylam.

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