RNA interference (RNAi) went through a painful stretch of doubt a few years back, but two of the sector's leaders, Alnylam (ALNY) and Isis Pharmaceuticals (ISIS) have come roaring back on the strength of both solid clinical data and a "risk on" bullish biotech market. Tekmira (TKMR), too, has come back into its own as a settlement with Alnylam has cleared away some legal and IP uncertainties and the company repositions itself as a product-focused biotech.
It's difficult to call any RNAi biotech cheap at this point, and I can't help but note that a great deal of valuation is being pinned to early-stage clinical programs, which history shows is often a very dangerous move. Even so, if investors consider what Tekmira could be in line to receive in the form of royalties and from its own pipeline, this shares could still offer some relative value.
Right Technology, Wrong Model
It is my opinion that one of the smartest things Tekmira has done in recent years is to really refocus around its own proprietary products. Tekmira has very good delivery technology, and delivery is a key issue in RNAi therapy as the stability of the molecules is a real problem. Several studies have backed up the quality of Tekmira's liquid nanoparticle (LNP) approach and the company has been working on forms of the technology that will allow for subcutaneous administration (as opposed to infusions).
The problem is that being a technology developer and drug facilitator only gets a company so far. PDL Biopharma (PDLI), Flamel (FLML), Nektar (NKTR), and Alkermes (ALKS) have all tried to build a business around licensing technologies to other drug developers to allow them to create better, more effective drugs with more attractive dosing options, but none have really thrived from that approach. Technology agreements tend to offer only low royalties and while those cashflows can keep the lights on and fund further R&D, they have never really been the ticket to success. I will argue that much of Alkermes' positive revaluation in recent years has been tied to its growing proprietary platform.
Delivery technology was also at the heart of a serious row between Alnylam and Tekmira a few years back. The two companies were partners and collaborators, but Tekmira argued that Alnylam was essentially trying to undermine them and subsume their delivery technology. A settlement was ultimately reached that gave Tekmira an influx of cash and maintained Alnylam's right to use Tekmira's delivery technology (for a price), and Tekmira's LNP delivery technology is used in Alnylam's lead TTR02 compound.
Shifting The Focus To A Proprietary Pipeline
One of the challenges facing the RNAi industry is the relative lack of interest shown recently by Big Pharma. Merck (MRK) hasn't done much with its Sirna acquisition, Roche (OTCQX:RHHBY) has closed down its work in RNAi, and Novartis (NVS) seems to have cooled noticeably on the approach. Tekmira's partner Bristol-Myers (BMY) has yet to identify or advance any compounds under that agreement, and Sanofi (SNY) and GlaxoSmithKline (GSK), Isis's partners, are about the only major companies showing real interest in the space today.
With that, I think Tekmira has rightly determined that waiting around to provide LNP technology to would-be RNAi drug developers is not going to get them anywhere fast. As the settlement with Alnylam also gave Tekmira some in-licensed new gene targets, Tekmira has started to focus more of its attention on its own development pipeline.
Tekmira's lead compound, TKM-PLK1, is in Phase I/II testing for GI neuroendocrine tumors and adrenocortical carcnimoas, two rare cancers that are poorly managed with current therapies. An interim analysis of the current trial has shown that 40% patients receiving a particular dose (or higher) are showing clinical benefit. That's not the stuff of oncology blockbuster dreams, but it would be good enough to support a pivotal study and potentially address a market worth $400 million or more.
TKM-Ebola is being developed under a contract with the U.S. government and a new formulation has shown 100% efficacy in non-human primates at a dosage below the point where limiting toxicities have been seen. This product is being developed under a protocol called "the Animal Rule" where approval can be granted on the basis of efficacy studies in animals and successful safety studies in humans at the same dosages (it's unethical to actively infect a study group with Ebola, and impractical to monitor a population waiting for infections to treat). The government is funding this early-stage research and if the drug secures approval, purchases would likely be made under the Project Bioshield Act. Given past purchases for anthrax, smallpox, and botulism, Tekmira could see annual purchases in the range of $50 million to $100 million if TKM-Ebola gets approval.
Behind PLK1 and Ebola are other preclinical programs targeting hepatitis B, alcohol dependence, and potentially Marburg virus as well.
Trying To Assign Values To Early Stage Programs
In the near term, Tekmira is most likely to see revenue from license/royalty agreements. The company's delivery technology is used in the oncology drug Marqibo (now owned by Spectrum (SPPI)), and this could generate about $5 million to $6 million a year in revenue. Alnylam's TTR02 could also generate more than $20 million a year for Tekmira before the end of the decade, while other Alnylam drugs using Tekmira delivery technology (ALN-PCS, licensed to The Medicines Company (MDCO), and ALN-VSP) have a less certain path to market at this point. Using my current assumptions for the approval odds and market potential of TTR02, I give Tekmira a $3.50 per share value for that royalty stream.
As the only drug in human studies, I give PLK1 a value of between $3.00 and $3.50 per share today. I base that target on an estimated revenue of $400 million, approval odds of 25%, and a marketing partnership. Those odds are actually higher than what the history of oncology drugs would normally support at this phase of development, and I'd certainly acknowledge that the potential revenue figure could change as more data become available.
I normally do not assign value to preclinical programs, but I believe TKM-Ebola is different enough to merit an exception. If the drug secures approval and the government buys $75 million a year of the drug, that would be worth a little more than $3.50 per share today.
The Bottom Line
All told, I believe TTR02, PLK1, and TKM-Ebola support a value of around $10.50 per share on Tekmira. I have no doubt that Tekmira bulls will argue that PLK1 is worth much more, and I would agree that it might be but there isn't enough data to go on at present. Likewise, I do believe that Tekmira's preclinical pipeline (ex-Ebola) is worth something today, but assigning approval odds to most preclinical programs is so arbitrary that I do not believe it offers much usable information.
A valuation of $10.50 per share is enough to make Tekmira worth a closer look today, particularly as the company is in decent shape with cash and in position to bring more compounds into the clinic over the next year or two. With valuations on Alnylam and Isis in the high altitude zone and already presuming a considerable amount of success, Tekmira could offer some relative value at the cost of more clinical/developmental risk.
Disclosure: I am long ALNY and OTCQX:RHHBY. 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. (More...)
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