ALNY – Troubled Legal Battle Ahead For Alnylam

With shares of Alnylam Pharmaceuticals (NASDAQ: ALNY) up well over 150% year-to-date, with 52 week highs at $21.38, we began an investigation into their current valuation and pending catalysts. Alnylam is a biotech company with technology/intellectual property rights on some key patents in the RNAi space, and some early-stage pipeline candidates for several indications. Unfortunately, Alnylam is currently involved with several lawsuits that could have negative implications going forward.

In particular, we are going to examine their ongoing litigation with delivery partner, Tekmira (TKMR), and the potential risk this represents to the Alnylam. Alnylam appears to have convinced the sell-side that they likely win this case, given JP Morgan’s initiation report lacked any mention of the trial risk and the litigation is not mentioned or questioned on the quarterly calls. We believe investors have sufficient reason to be concerned about potential damages exceeding $100 million plus royalties due to Tekmira, if Tekmira’s claims are substantiated.

Ongoing litigation

Alnylam is currently involved in multiple lawsuits over their intellectual property and their recent battle with Tekmira has reports of misconduct. This trial Alnylam’s recent 10Q sums up the problem at hand quite succinctly:

“On March 16, 2011, Tekmira Pharmaceuticals Corp. and Protiva Biotherapeutics, Inc. filed a civil complaint against the Company in the Business Litigation Section of the Suffolk County Superior Court in Boston, Massachusetts, and on June 3, 2011, the plaintiffs filed an amended complaint adding AlCana Technologies, Inc. (“AlCana”), a research collaborator of the Company, as a defendant. The amended complaint alleges misappropriation of the plaintiffs’ confidential and proprietary information and trade secrets, civil conspiracy, and tortious interference with contractual relationships by the Company and AlCana, and unjust enrichment, contractual breach, breach of the implied covenant of good faith and fair dealing, unfair competition, false advertising, and unfair and deceptive trade practices by the Company. The plaintiffs seek, among other relief, injunctive relief, unspecified compensatory and punitive damages, attorneys’ fees, the termination of licenses that the plaintiffs provided to the Company and the relinquishment and transfer of certain of the Company’s intellectual property, including patents covering the Company’s MC3 technology.”

Tekmira is seeking damages within a range of $61 million to $446 million. These can be subject to doubling or trebling(if the defendant’s actions were deemed as willful), potentially bringing damages up to a range of $120 million to $1.3 billion. Some of the allegations and misdeeds of Alnylam appear to have some merit and likely were part of the reason Tekmira was able to push the lawsuit to this stage. Alnylam’s strategy throughout the dispute has been to delay as long as possible, given Tekmira’s limited financial resources. We believe a jury trial represents a serious risk to Alnylam’s ability to win the case.

A trial schedule and timeline have been set: final pre-trial conference will be on November 7th, jury empanelment will begin on November 13th and the trial will begin, in front of a jury, on November 14th. The appropriate legal filings can be found on Tekmira’s site. Alnylam recently signed a partnership with Genzyme for TTR02, a program covered under their agreement, requires a milestone payment to Tekmira. After two weeks, we have still not heard if Tekmira has received this payment. This quiet period might have been because the two parties were trying to settle before the pre-trial conference on Wednesday, November 7th, but a deal has still not been struck. The trial is slated to begin on Wednesday, November 14th.

Backstory

Tekmira and Alnylam have had ongoing collaborations going back to 2005, when Tekmira was known as Inex Pharmaceuticals. During this period, the two parties also were working with a private company, Protiva Biotherapeutics. Tekmira later acquired Protiva in 2008. Following this merger, Alnylam and Tekmira continued their collaborations on RNAi therapeutics, wherein Alnylam’s clinical candidates utilized Tekmira’s delivery technology, known as lipid nanoparticle(LNP). Nearly all of Alnylam’s clinical program rests upon Tekmira’s LNP technology.

However, when Tekmira released some ex-Protiva employees in October 2008, this is when the relationship started going south. In early 2009, Alnylam quietly hired some of these employees to form a Canada corporation, AlCana (“Alnylam Canada”). Many believed this to be a maneuver to get out of their licensing deal with Tekmira. Under this new venture, Alnylam supposedly invented a new generation of LNP called MC3, which was touted as independent of Tekmira’s licenses. Note the distinct similarities between the MC2 and MC3 in the drawing. Additionally, Tekmira has broad IP covering all LNP formulations(examples here and here), so there is probable reason to believe Alnylam’s MC3 infringes upon Tekmira’s IP estate.

Tekmira’s main claims surround misappropriation of trade secrets, breach of the license and manufacturing agreements, unfair and deceptive acts and trade practices. For example, Alnylam shared Tekmira’s proprietary delivery IP with Takeda, even though this was explicitly not allowed. Further, it was revealed that ex-Protiva employees had been caught stealing over 12,000 proprietary documents relating to Tekmira’s trade secrets that presumably led to AlCana/Alnylam MC3 developments. Tekmira filed for and was granted an injunction relating to the theft of these documents in the Canadian suit. We suspect Tekmira will work hard to present this evidence in their US case as well.

Financials and Ownership

Alnylam has roughly $293 million in cash, cash equivalents and total marketable securities balance as of 9/30. Alnylam expects to end the year with over $280 million in securities. Most notably in their recent third quarter release was the following statement:

“With respect to its ongoing litigation in the Massachusetts Business Court with Tekmira Pharmaceuticals Corporation, Alnylam expects a jury trial to commence on November 14, 2012. The company’s financial guidance for 2012 excludes payments, if any, that could be made in connection with the resolution of this ongoing litigation.

This appears to be the first instance wherein Alnylam has publicly acknowledged the possibility of resolving this matter with Tekmira. More importantly, Alnylam seems keenly aware that the cost to settle with Tekmira could very well be significant enough to have a significant material impact on their financial guidance.

Management has been quite opportunistic with their stock selling all year long. We should also caution that the recent sale of 1.55 million shares of Novartis’ (NVS) ownership in Alnylam. This sale was triggered following a letter from Novartis, which now allows Novartis to register its remaining shares and sell them at any time. Novartis now owns a little over four million shares of Alnylam, which amounts to about 8% of outstanding. This letter combined with Novartis early-stage deal with Marina Biotech for delivery technology points to Novartis’ disinterest in Alnylam.

Conclusion

Given their actions to date, Alnylam appears to have set themselves up for a tough case to win. There appears to be sufficient merit to the evidence Tekmira has presented to the judge overseeing the US case that he’s pushed things toward a jury trial and become agitated with Alnylam’s delay tactics. With potential damages of over $100 million, Alnylam may potentially try and settle this case before the jury trial begins for significant upfront cash and royalties on clinical programs. Given the risks, investors should be questioning the risk-reward of holding Alnylam currently.

Disclosure: Author is long TKMR. See our disclaimer for more information.

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