Arrowhead’s Novartis RNAi Deal: Big Boost or ‘Stale Potato Chips’?

Xconomy Wisconsin — 

Arrowhead Research CEO Christopher Anzalone thinks he just got a massive bargain. For just $35 million, his company grabbed Novartis’ last remaining RNA interference assets: a group of patents and preclinical drug candidates that give Arrowhead more technological tools to play with.

If all goes as Anzalone hopes, this one small deal could “substantially” expand his company’s capabilities and give it a better chance to deliver RNAi drugs to market, he said in a conference call Thursday with investor analysts.

Despite a rival’s dismissal of the deal’s significance, Anzalone told Xconomy that the Novartis assets allow his company to develop RNAi drugs for “any target” and “any indication,” among other benefits.

John Maraganore, CEO of RNAi leader Alnylam Pharmaceuticals (NASDAQ: ALNY), told Xconomy he thinks that the Novartis assets—some of which once belonged to Alnylam—are “pretty un-useful.”

Arrowhead (NASDAQ: ARWR) already has two candidates in clinical testing for hepatitis B and the rare genetic disorder Alpha-1 antitrypsin deficiency. The drugs are in Phase 2 and Phase 1 trials, respectively.

Arrowhead has built its pipeline and strategy around nanoparticles that shepherd fragile RNAi drugs as they move through the body to their target cells. Delivering RNAi drugs into the right cells has been a major obstacle for companies in this space; Arrowhead thinks its particles, which it calls “dynamic polyconjugates,” solve the problem.

The Novartis deal is meant to help Arrowhead expand its technology so it can make the most effective therapeutics possible, Anzalone said. “This is all about maximizing our ability to silence target genes, and with this acquisition, we have increased our ability to do that and have broadened out our freedom to operate.”

The acquisition includes four key pieces:

—A license to 30 of the 31 gene targets Novartis originally licensed from Alnylam, which does not include technology for delivering the drugs. Alnylam would receive milestone payments and royalties in the “high single digits” for sales of any approved therapies targeting any of those 30 genes, Maraganore said. The specific genes and the target diseases have not been disclosed.

As for the 31st target, Anzalone said Novartis “sent one target back” to Alnylam. He declined to comment further, and Maraganore was tight-lipped about it as well. (It’s not the first time Arrowhead has snagged Alnylam technology. The pair signed a cross-licensing deal in 2012.)

—Rights to three Novartis preclinical RNAi drug candidates. Arrowhead declined to disclose the targets or any data Novartis accumulated on the drugs’ performance. Anzalone doesn’t expect Arrowhead will start any clinical trials for those three drug candidates this year, but the company will evaluate “whether or how we’re going to move those forward.”

—The rights to molecules developed by Novartis that Arrowhead thinks match or surpass the capabilities of similar molecules commonly used to trigger the drug’s RNA interference mechanism, Anzalone said. Arrowhead contends this technology falls outside of competitors’ existing patents and gives the company the freedom to develop drugs for any target and indication.

—Rights to “intracellular targeting ligands” developed by Novartis, which are specialized molecules that bind themselves to the RNAi trigger molecules and appear to boost their activity, Arrowhead said. The theory is the ligands might also increase the stability of the RNAi trigger molecules, thereby potentially helping the drug’s gene-silencing effects to last longer, Anzalone said.

The sale marks the end of Novartis’ decade-long foray into RNAi, a field that has gone through ups and downs over the past 15 years trying to live up to the promise of a new class of drugs to treat diseases other medications couldn’t touch.

Early on, RNAi’s potential drew several companies. Novartis got in via a partnership with Cambridge, MA-based Alnylam in 2005 worth some $56 million at the outset, and potentially $700 million more, if the collaboration led to multiple approved therapies.

But over the next few years, Big Pharma bolted from RNAi, opting to cut their losses in part because of problems with effectively delivering these drugs to their targets. That exodus included Roche, which sold much of its RNAi technology—along with its R&D team in Madison, WI—to Pasadena, CA-based Arrowhead for $25 million in 2011.

Novartis continued to work on the 31 gene targets it had licensed from Alnylam, but it declined to extend their partnership in 2010.

That decision was a blow to Alnylam: it soon cut a quarter of its workforce. But the company kept plugging away, and is now closer than anyone to commercializing the first RNAi drug. Its first candidate, patisiran, is in Phase 3 trials that should wrap up in 2017. It has also climbed from the depths to a $9 billion market cap, more than $1 billion in cash in the bank, and plans to grow its staff to 700 from about 250.

Novartis, meanwhile, announced plans last spring to get out of RNAi entirely, prompting Maraganore to publicly chastise Big Pharma for, in his view, an inability to innovate.

Anzalone expressed interest in Novartis’ R&D portfolio in early 2014, before the Swiss company publicly announced intentions to abandon the field. “We were sort of getting rumblings that they were slowing down,” Anzalone said.

Talks progressed during the summer. Arrowhead leaders believed there would likely be multiple bidders for Novartis’ RNAi technology portfolio, including “several venture-backed groups interested in building new companies around all those assets,” Anzalone said. Arrowhead decided to pay Novartis $7 million to buy some time; that allowed it to exclusively vet the RNAi work before making a final offer. “We wanted to make sure if we didn’t get the assets, it’s because we didn’t want them, not because” another company bought them “out from under us,” he added.

Over the past few months, Arrowhead took a look under the hood. “We were really excited about what we saw,” Anzalone said. “It was a deal we really felt we had to do.”

Arrowhead announced the purchase Thursday, saying it would pay Novartis an additional $3 million in cash and $25 million in stock for the RNAi assets. Arrowhead’s stock closed Thursday at $7.94 per share, up nearly 6 percent from the previous day’s close at $7.51.

Alnylam’s Maraganore doesn’t see the appeal. In an interview with Xconomy, he likened the deal to “buying a bag of stale potato chips.”

It would be easy to chalk up this difference of opinion to predictable posturing by a competitor. But the dynamics go much deeper than run-of-the-mill IP maneuvering, given the fractured alliance between Novartis and Maraganore’s company and the fact that he knows these Novartis assets better than most.

“We certainly had a lot of familiarity with the IP, and zero interest in acquiring any of it,” Maraganore said.

He also takes issue with Arrowhead’s assertion that the Novartis patents give it the ability to develop drugs that go beyond the 30 targets tied to the Alnylam IP. “That’s a statement that I think is a bit phantasmagorical,” he said. “At a very high level, these are patents that don’t overcome the early, broad patents in RNAi that only Alnylam has access to.”

Anzalone was left scratching his head at Maraganore’s reaction to the deal. “For him to scoff at the value of this is a little bit funny when a big part of this is a license to his IP for 30 targets,” Anzalone said. “That alone is quite valuable, we think.”

What’s more, Anzalone thinks Arrowhead has a better understanding of Novartis’ RNAi assets than Alnylam, thanks to the close look it got when vetting the technology. “We are better positioned to opine on the value of these assets than someone who hasn’t seen them up close,” he said.