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Alnylam Offers an Exciting Rare Disease Pipeline, but Expectations Are High

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"Biotechs are risky" is a standard boilerplate warning when writing about the sector, but some situations are riskier than others. In the case of Alnylam Pharmaceuticals (NASDAQ: ALNY  ) , the sell-side seems so eager to make a bullish case that uncommonly high approval odds are already being applied to the company's early stage pipeline.

There is also still the prospect of competition from Isis Pharmaceuticals (NASDAQ: IONS  ) and its partner GlaxoSmithKline (NYSE: GSK  ) , as well as other large players like Sanofi (NYSE: SNY  ) , Novo Nordisk (NYSE: NVO  ) , and Baxter (NYSE: BAX  ) . Against that is the possibility that Alnylam is following a path that could closely resemble that of other rare disease biotechs like Genzyme, Alexion (NASDAQ: ALXN  ) , or BioMarin (NASDAQ: BMRN  ) .

Targeting Transthyretin
Amyloidosis almost became something of a punchline on the medical drama House, M.D., but it is a real, serious, and undertreated disease. Alnylam has developed two drug candidates targeting two transthyretin-mediated amyloidosis conditions -- familial amyloidotic polyneuropathy (FAP) and familial amyloidotic cardiomyopathy (FAC). Neither are common, with about 10,000 and 40,000 patients worldwide, respectively, but both can seriously decrease the quality and length of a person's life. Once amyloidotic heart failure (FAC) becomes symptomatic, mean survival is less than two years.

While Isis (and its partner Glaxo) are targeting both forms with a single drug (ISIS-TTRrx), Alnylam is using two drugs: TTR02 (or patisiran) for FAP and TTRsc for FAC. Alnylam has already reported strong data on patisiran, with a phase 2 study showing a mean reduction of more than 85% in TTR serum protein levels. That data back on TTRsc is not quite as robust at this point, though a phase 1 study did show knockdowns of more than 90%.

There are still a lot of risks here. While both drugs could be $1 billion-plus opportunities even with the presence of Isis/Glaxo in the market, it is important to note that the studies done so far have measured serum protein levels and not clinical endpoints. Prior studies conducted by Pfizer (NYSE: PFE  ) and others have shown correlations between knockdowns and clinical benefit, but there is still a risk that Alnylam's drugs will not show a similar outcome.

Hemophilia promising, cholesterol not so much
Although it is still technically a preclinical program, and it is dangerous to ascribe much value to a drug before it even hits the clinic, I'm optimistic about the prospects for ALN-AT3 -- a drug that looks to treat hemophilia by a different mechanism that current therapies from Novo Nordisk, Biogen Idec (NASDAQ: BIIB  ) , and Baxter.

AT-3 knocks down antithrombin, and while I am not sold on this approach as a front-line therapy for hemophilia A or B, I think it is an interesting approach to those patients who develop inhibitors to existing hemophilia therapies. More than 20% of severe hemophilia A patients and a single-digit percentage of hemophilia B patients develop inhibitors at some point. It often costs upward of $300,000 a year to treat these patients, and with an addressable market of 5,000 or so patients in the U.S. and EU, I believe there is the potential for AT-3 to become a billiondollar drug as current alternatives from Novo Nordisk and Baxter often require multiple dosing and are not given on a prophylactic basis.

I'm less optimistic on Alnylam's cholesterol drug, which the company has licensed to The Medicines Co. for further development. There are multiple treatments in clinical trials targeting the same PCSK9 target, and I believe Alnylam's compound is significantly behind others like Amgen (NASDAQ: AMGN  ) and Sanofi. The multibillion-dollar cholesterol drug market is likely big enough to support multiple winners, but I think it's going to take a significant advantage in efficacy, safety, or dosing (none of which has been seen so far) for this drug to really carve out a valuable niche.

Tying the valuation together
I believe that Alnylam's drugs for FAP and FAC could attain $1 billion and $2 billion in peak sales, respectively, even with competition from Isis and Glaxo. I currently assign a 35% chance of success for the FAC program (which is on the high side for Phase II programs) and a 55% chance of success for the FAP program. Those odds, too, are high for a phase 3 program, particularly when there have not been any relevant clinical endpoints reported so far, and I am a little concerned at the number of sell-side analysts who treat the success/approval of patisiran in FAP as a fait accompli. In any case, the discounted value of this programs works out to $24 and $30 per share, respectively.

For the cholesterol program, I currently calculate $1 per share of value to Alnlyam due to low approval odds (my 20% odds of approval are more in line with historical norms at this stage of development), relatively low royalties to Alnylam, and my expectation of relatively low market share. For AT-3, though, I'm calculating nearly $4 per share in value on just 10% odds of approval at present.

The bottom line
Adding in other pipeline candidates (like HPN, AS1, and CC5) but excluding cash, I calculate a fair value of $61 per share today for Alnylam. That is below today's price, but I'm not in any hurry to sell out my position. First, there is a lot of estimation and guesswork that goes into calculating the value of a biotech's pipeline and I'm not about to confuse precision with accuracy.

Along those lines, as more data come out and the company advances other programs, the time to peak sales and approval odds should improve, increasing the expected value of the stock. A year from now, for instance, the discounted valuation would be almost $8 higher even if all of the other inputs remain the same. There is also the informative example of Alexion, which has seen its real addressable market and drug prices develop well in excess of the expectations when its lead drug was in phase 2/3 testing.

Although I'm worried about excessive Street enthusiasm -- for biotechs in general and Alnylam in particular -- I'm still bullish on balance about Alnylam and this is a stock I hope to own for a long time.

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