The trouble with being a trailblazer is that whenever there are brambles or gopher holes along the way, you're the first to blunder into them. Alnylam (Nasdaq: ALNY) is unquestionably one of the pioneers of RNAi drug technology, but this is a technology that is far from ready for primetime. While RNAi might very well take its place alongside Amgen's (Nasdaq: AMGN) recombinant proteins or Roche's (Nasdaq: RHHBY) monoclonal antibodies and became a major therapy class, it may also go the way of antisense or gene therapy – a promising theoretical approach that produces little in the way of marketable drugs.
The latest blow to Alnylam comes from Roche's decision to cut costs by firing part of its research staff and curtailing some development programs, including RNAi research. Alnylam and Roche signed a development deal over three years ago, a deal that was originally advertised as a $1 billion alliance – assuming, of course, that preclinical programs developed to full fruition.
Now, though, there is a real risk that those product milestones and royalties never come and the deal is instead just the $331 million upfront payment and 2M share investment.That would take out a sizable chunk of Alnylam's potential revenue over the next few years (development milestones) and substantially bump up the dilution that investors can expect (since the company will have to raise the money from the markets instead of getting its from Roche's development progress).
This follows Novartis's (NYSE: NVS) decision a little while ago to not expand its product development agreement with Alnylam and end its research collaboration. That, then, is two major partners and two globally-respected top-tier drug companies that have decided that they do not need to rush forward in RNAi development.
This is not the end of the line for Alnylam by any stretch. First, the company has an exceptional amount of cash on the balance sheet today. Moreover, Roche has not stated that they are abandoning RNAi research for good. While they are ending RNAi research in Germany and Wisconsin, those programs could be moved to other locations and resumed at a later date. Moreover, if Alnylam can get a few compounds into Phase 2 testing and show strong clinical efficacy, it would not be at all surprising to see companies try to jump back into the space.
Now, Alnylam's stock...
Clearly, I was way too eager to get into this name when I bought a few months ago. You would think I would have learned my lesson with Isis (Nasdaq: ISIS) quite a few years ago, but I look at Alnylam (and early stage biotech in general) as my substitute for gambling or playing the lottery. Relatively few of these plays will ever pay off, but the ones that do will pay off well and I find that these investments stimulate my intellectual curiosity and feed my inner life sciences geek.
Moreover, I still do actually believe that Alnylam can be a leader in RNAi technology and that RNAi-based treatments can be a major new category of pharmaceutical compounds in the next decade. The company has
over $5 nearly $9 a share in cash on the balance sheet (or about $7.50 on a fully diluted basis). Granted, that cash is going to get whittled away by ongoing R&D demands, but paying a little more than 2x 1.25x cash for potentially blockbuster technology is not ridiculous from a valuation perspective.
Alnylam's stock is almost certain to take another beating today, and there's no obvious near-term catalyst. As with most biotechs, the odds are that any incremental news will be negative not positive. Still, for those with a strong stomach, a lot of patience, and a long-term horizon, this is one of the most interesting biotech names today.
Disclosure: I own shares of Alnylam
Update: I mistakenly went with just the cash and short-term securities on the balance sheet in the original posting, excluding the securities categorized as long-term investment assets. I was in a rush and I apologize for the sloppy error. ss