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Under Appreciated Tekmira Starting to Bounce May Head Higher as Sector Heats Up4 hours ago by Marketwire

Immediately after Tekmira (NASDAQ: TKMR) (TSX: TKM) announced that it had settled litigation between it and Alnylam Pharmaceuticals, Byron Capital analyst Douglas Loe maintained his SPECULATIVE BUY rating on the company, but raised his price target on shares a full $5 to $12.50.

That was only a couple of months ago, but shares are still trading under $5. This despite the fact that Tekmira announced it would receive $65-million (within ten days) as part of that settlement and is eligible to receive $10-million in near-term milestone payments in 2013, biotech traders seem to have either lost sight or interest in the stock. Meanwhile, even some of the well trained eyes we spoke to recently said at first glance: "It looks like they are going to need to do a raise, doesn't it? They must be running out of money."

In fact, thanks to the hefty lawsuit settlement, Tekmira's cash runway now extends into 2015 and management at the firm is excited about plans to aggressively advance multiple products into human clinical trials.

"TKM (is) Trading at Levels Ascribing Virtually No Value to Well-Advanced siRNA Pipeline," wrote Loe in a note to clients. "The capital markets are ascribing little value to Tekmira's siRNA pipeline, which has advanced well beyond the proof-of-concept stage and has already performed well in several human or non-human primate studies, greatly reducing development risk not only to siRNA and to LNP, but to the drug candidates to which clinical data apply."

The entire RNAi drug development space is now at critical inflection point and the fact that Alnylam Pharmaceuticals is using the this particular platform as a key component adds validation to Tekmira's lipid nanoparticle (LNP) delivery technology -- which acts as a delivery mechanism for RNAi therapies. Dirk Haussecker, who arguably runs the most credible and up to date RNAi information sites on the planet, recently opined that "2012 was the most exciting year in the ~12-year history of RNAi Therapeutics -- both from a scientific and financial perspective... With the start of 2013, the industry is looking to build on these successes with additional clinical trial results, interesting new therapeutic candidates and product specific and platform-related deals, particularly in the area of delivery. With appetite for innovation increasing in a low interest rate economy and with the orphan drug tsunami, 2013 could be a quite rewarding year for the discerning investor."

A bullish nod comes from the JP Morgan Healthcare conference which wrapped up a couple of weeks ago. This is the largest conference for the industry featuring endless companies getting news out and doing whatever they can to get attention. It's apparent that ALNY caught attention unlike the others. After their presentation at break-out meetings, where information flow borders on offside, they must have spoken about upcoming partnering deals of great magnitude and/or that they expect strong data. Using that momentum, Alnylam announced a public offering of 8 million shares at $20.13 a share on Jan. 14. After an overallotment of another $1.2 million a week later, the company raised a total of $173 million.

Smart investors should understand that Tekmira benefits here too. With its Alnylam's lead core drug candidate poised to enter pivotal trials before the end of the year, and a goal to bring four more to advanced clinical trials by the end of 2015, the company says it will ultimately need all of the $400 million in cash in its coffers for advancing its own pipeline.

When ALNY advances, TKMR does too. You see, Alnylam's drugs use RNA interference, or RNAi, technology which works by turning off or silencing disease-causing genes. ALN-TTR02 is one of the company's most advanced experimental products. It is designed to treat transthyretin familial amyloid polyneuropathy, a rare condition that is normally treated with a liver transplant. Tekmira would become a $1B company on ALNY's TTR02 approval alone. That simple extrapolation comes from documented research. Remember, also Alnylam has other clinical products that Tekmira has a financial stake in (ALN-PCS and ALN-VSP) but TTR02 is the most advanced. Investors and analysts are placing the majority of Alnylam's value on this drug.

There are a wide range of estimates on what peak annual sales could be for TTR02 if it is approved. Certainly we have seen figures ranging from $800M to upwards of $2B. Tekmira is entitled to a single-digit royalty on sales of this product. So Tekmira could, at peak, be receiving an annual royalty of approximately somewhere between $40 to $80M.

Since there are no COG/COS associated with a royalty, this would flow straight to the bottom line. Looking at mid-point of the royalty range, Tekmira with a $60M bottom is earning $3.50 per share (using their fully diluted share count). Using a P/E ratio of 25 you arrive at a share price of $87.50 and a valuation of $1B+.

Again, this is a simplistic calculation that takes no account for R&D spending and any future dilution, but we think it demonstrates how lucrative the TTR02 royalty could be by itself. Some argue that a $1B valuation for Tekmira after a TTR02 approvable could be conservative.

From a qualitative standpoint, TTR02 has the potential to be the first RNAi drug approved by the FDA. Regardless of the sales figures, the approval will be a huge win for RNAi as a new class of medicine. All companies developing drugs in this space will stand to benefit but none more than Tekmira.

Add that to statements that Dr. Mark J. Murray, Tekmira's President and CEO, made in November: "We recognize that the primary value driver for Tekmira will be the clear demonstration of the clinical value of our own pipeline of RNAi products in a range of therapeutically important, commercially attractive markets. We expect that our lead oncology product, TKM-PLK1, will enter a Phase 2 trial in 2013; we continue to advance our TKM-Ebola product in collaboration with the U.S. Department of Defense's TMT program; and, we continue to generate data to support near-term decisions around further development of other product candidates within our pipeline. In addition, we are entitled to future royalty payments based on sales of Marqibo, which was recently approved by the FDA."

Analyst Loe agrees: "Moreover, the capital markets are ascribing virtually no value to future royalties that we project Tekmira will receive for long-standing liposomal vincristine formulation Marqibo (originally called ONCO-TCS when tested in advanced non-Hodgkin's lymphoma by Inex years ago). Partner Talon Therapeutics received FDA approval in a niche cancer market (Philadelphia chromosome-negative acute lymphoblastic leukemia, or ALL) for this drug in Aug/12, for which we project peak annual royalty revenue (and EBITDA) to Tekmira of $3.5 million - $4 million. Timelines to achieving peak annual royalties clearly await completion of Talon's now-public intention to identify strategic partners or acquirers for the firm, but we believe interested parties once identified will regard Marqibo as a core commercial asset within Talon's drug portfolio."

Yesterday, Roberto Pedone of TheStreet.Com also noticed that shares Tekmira company appear to have begun hammering out new lows. He noted: "From a technical perspective, TKMR is bouncing strongly here right off its 50-day moving average of $4.95 with above-average volume. This stock is quickly moving within range of triggering a near-term breakout trade. That trade will hit once TKMR takes out some near-term overhead resistance levels at $5.35 to $5.78 with high volume. At last check, TKMR have hit an intraday high of $5.45 and volume is just starting to surpass its three-month average action of 61,738 shares."

The RNAI sector is definitely starting to heat up again. Tekmira doesn't need to raise money, so for us it is just a question of when, not if, institutions start piling into the market to take a position.

Author M.E. Garza is Long TKMR. The full version of his report, including charts and informational graphics, can be found here:


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