We have previously spoken about Alnylam Pharmaceuticals (NASDAQ: ALNY) legal troubles with Tekmira Pharmaceuticals, and successfully predicted they would settle. Today, we want to talk a bit about their current valuation and where their programs stand relative to competitors. Alnylam has the rights to some important intellectual property for the RNAi space, however, they are in no way the lead drug developer of RNAi treatments. Recent news from close friends Isis Pharmaceuticals (ISIS) should make some industry observers question Alnylam’s lead drug development plans.

TTR-02 falls behind ISIS-TTRRx

Currently, there are 3 main clinical programs for a rare genetic disorder called Familial transthyretin amyloidosis (FAP) or Transthyretin (TTR)-mediated amyloidosis (ATTR). FAP is a very rare disease caused mutations in the TTR gene, which is predominantly expressed in hepatocytes.  FAP affects roughly 5,000 to 10,000 patients worldwide with the majority of patients clustered in Portugal, Japan, Spain, France, Sweden, the United States, and England. There is another type of TTR amyloidosis, familial amyloidotic cardiomyopathy (FAC), that  affects close to 40,000 patients worldwide, but it is unclear if current investigational therapies will be able to target these patients.

Currently, Pfizer is the furthest in development of treatments for FAP with Vyndaqel (Tafamidis). Vyndaqel is currently approved in Europe, however in the US, the FDA has asked for a new trial, citing issues with the lack of US patients and questions over trial size. Although a setback, Pfizer’s main goal all along has been to show clinical benefit, not just TTR knockdown or stabilization alone in patients with FAP. These endpoints represent meaningful improvement for patients’ quality of life, rather than merely success in a metric.

In second, we find Isis Pharmaceuticals’ ISIS-TTRRx. ISIS-TTRRx is an antisense RNA drug designed to treat transthyretin amyloidosis by inhibiting the production of all forms of TTR. Earlier this year, Isis and GSK reported results from their randomised Phase I study showing healthy subjects in the 200 mg and 400 mg multiple-dose cohorts displayed a mean reduction of 44 percent and 81 percent in TTR levels after four weeks of dosing. To date, ISIS-TTRRx has not been tested in patients with FAP.

Isis and GlaxoSmithKline (GSK) recently amended their deal over the development of ISIS-TTRR. They plan to initiate a registrational phase II/III study evaluating the efficacy of ISIS-TTRRx once-weekly on neurological dysfunction and quality-of-life in 195 patients with FAP over 15 months on therapy. This trial is set to begin enrollment by the end of this year and likely won’t complete until at least 2015 or later.

Lastly, we find Alnylam with ALN-TTR02. To date, Alnylam has done 2 trials of internal candidates for FAP, ALN-TTR01 and ALN-TTR02. Both are systemically delivered RNAi therapeutics being developed for the treatment of transthyretin (TTR)-mediated amyloidosis (ATTR). ALN-TTR02 is a more potent formulation of ALN-TTR01. ALN-TTR01 was initially tested in 31 patients with ATTR and showed encouraging TTR serum knockdown, however, the study only looked at a single dose of ALN-TTR01. Alnylam felt they could increase the potency to achieve higher TTR knockdown, hence ALN-TTR02. Earlier this year, they reported TTR knockdown data from a single-dose in healthy patients demonstrating the increased potency and began a Phase 2 study in patients with FAP.

Alnylam plans to start a registrational trial of ALN-TTR02 in the second half of 2013, likely following the results of a small Phase 2 study in patients with ATTR. Currently, they are also working on a subcutaneous version of ALN-TTR02 utilizing a novel delivery technology, ALN-TTRsc, which utilizes a GalNAc-conjugate delivery approach and subcutaneous dose administration. This change of delivery requires a complete restart in the clinic; they plan to file IND enabling studies this year. Their GalNAc-conjugate delivery has yet to be tested in the clinic.

Admittedly, this new Phase 2 study should leave investors wanting more from Alnylam’s development for ALN-TTR02. The current Phase 2 trial in patients with ATTR is only studying  the drug once every four weeks for two cycles (2 doses). This not nearly enough data to establish the safety of long-term exposure to phosphorothioate oligonucleotide nor does it approach the question of efficacy. With the recent troubles Isis ran into during their FDA advisory committee and a negative vote by the European Medicines Agency’s CHMP for mipomersen, investors should be wondering why Alnylam is cutting corners on the development of ALN-TTR02.

Frankly, we are not surprised that Alnylam partnered the rights of their whole TTR program to Genzyme for Japan and other Asia-Pacific countries for so little. Alnylam’s inexperience in developing drug candidates was likely a major reason. Why else would they give up Japan, which has the largest cluster of patients with FAP in the region? Alnylam still has much to learn as a clinical stage company before we can take their development efforts seriously.

Pipeline

Management has tended to jump around on what exactly their 5×15 strategy was supposed to accomplish. It is currently defined as five products in clinical development by the end of 2015 – a significant back-track from less than two years ago when they meant having five of these products in late-stage clinical trials for genetically defined diseases by end of 2015. Alnylam has investors hoping that their TTR program will work out in the end and that their preclinical programs for hemophilia will also be equally profitable.

Currently, we are skeptical that Alnylam will be able to land a partner for their PCSK9 program, given their Phase 1 study was a single-dose study in healthy patients and competitors Amgen and Regeneron-Sanofi are already in Phase 3. A large pharma would be taking on a considerable amount of risk in partnering with such an early-stage cardiovascular program that has yet to prove meaningful safety and efficacy data.

Financials and Valuation

Alnylam incurred a $65 million charge during the fourth quarter because of their settlement with Tekmira. Alnylam is guiding to end 2012 with greater than $215 million in cash. Currently, Alnylam’s enterprise value is around $650 to 700 million, excluding their stake in Regulus (RGLS), a spin-off between Isis and Alnylam.

Piper Jaffray recently upgraded Alnylam to overweight from neutral with a $25 price target. After seeing the reasoning, we are astonished anyone cares.

“Specifically, we now value ALN-TTR02 at $922 million by applying our standard 5x multiple to U.S. and EU sales of $1.18 billion in 2018 discounted back at 45% back through YE:13. Prior we valued ALN-TTR02 at $574 million by applying our standard 5x multiple to 2018 global sales of $1.7 billion (including Japan which is now partnered with Genzyme) discounted back at 45% through mid-2013.”

Alnylam hasn’t even begun Phase 3, which will likely take 3-4 years at a minimum to complete and now they are behind the competition. Previously, JP Morgan did something similar in their initiation on Alnylam, ascribing a 65% chance of Alnylam’s TTR drug getting approved based on what they saw from the Phase I data. When we see analysts throwing at such unrealistic numbers and fluff discount rates, investors should be questioning the motives.

As we said before, Alnylam’s management has been opportunistic with their stock selling all year long. We also do worry that the  recent sale of 1.55 million shares of Novartis’ (NVS) ownership in Alnylam could lead to further selling, following a letter from Novartis, which now allows Novartis to register its remaining shares and sell them at any time. Novartis owns a little over four million shares of Alnylam, or 8% of outstanding.

Conclusion

Investors seem to be giving Alnylam a bit too much credit for their recent early-stage developments. Sure, RNAi has been making a comeback given recent successes in the sector, but still Alnylam is nowhere close to being profitable nor have they established long-term efficacy or safety with their lead programs. Alnylam’s valuation seems much too rich given the long road ahead they have in reaching the market.

Disclosure: Author is short ALNY