Posted By: Margaret Pozzini

By Ralph CasaleMon Nov 6, 11:12 AM ET

Validation is one of those words that can have different meanings in different contexts. To the FDA, validation describes an intricate series of evaluations designed to demonstrate that an effect is reproducible and not an artifact of how it was measured. To investors, it is confirmation of an investing thesis demonstrated by simply watching a company's share price rise. ADVERTISEMENT
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Late last week, Alnylam
Pharmaceuticals (Nasdaq: ALNY - news) reported their third-quarter results. The news of the day did not, however, have a lot to do with the financials released by the company, so I'll comment on those later. Instead, the buzz surrounding Alnylam had to do with Merck & Co.'s (NYSE: MRK - News) bid earlier in the week to buy competitor Sirna
Therapeutics (Nasdaq: RNAI - news) for $1.1 billion. The $13 per share offer was a greater than 100% premium over the prior share price of Sirna, and also drove the price of Alnylam up more than 18%. Early in the Alnylam Q3 conference call, the Merck offer for Sirna was described as validating the pharmaceutical use of RNA interference (RNAi) technology. Investors likely agreed.

RNAi operates by targeting messenger RNA with short interfering double stranded RNA (siRNA) and preventing it from being translated into protein, thus 'knocking-down' specific gene products. The technology garnered the 2006 Nobel Prize in Physiology or Medicine for Andrew Fire of Stanford University and Craig Mello of the University of Massachusetts Medical School. It has been rapidly adopted in the pharmaceutical community as a research tool used to demonstrate that specific proteins in the body are associated with a disease state and 'drugable'. This process is known as 'target validation' (there's that word again). While siRNAs have proven to be an invaluable research tool, they still faces many challenges en route to becoming a drug entity themselves, including systematic delivery and target specificity.

Big pharma has certainly recognized the potential for siRNAs as therapeutic entities. Alnylam has signed collaborations with Medtronic (NYSE: MDT - News) and Novartis (NYSE: NVS - News), and just recently Biogen
Idec (Nasdaq: BIIB - news). They also have a collaboration with Merck directed at developing siRNA-based therapeutics for multiple targets. One can only wonder what value Merck will put on these agreements once it has integrated the Sirna acquisition. Alnylam considers their intellectual property necessary for the commercialization of a drug based on the RNAi technology.

As to the released financials, Alnylam had a strong quarter. Revenues of $8.2 million were derived primarily from collaborations and licensing agreements. These helped to offset $12.8 million in research and development expenses. Net loss for the quarter was $7.4 million. Alnylam began the quarter with approximately $123 million in cash, equivalents, and investments, and ended with approximately $120 million for a $3 million quarterly cash burn. This burn rate is quite modest for an early stage drug development company.

Ultimately, validation for a drug technology will only be obtained when the FDA gives it blessing to "go forth and begin marketing." With only one clinical trial beyond Phase I, this day is still a long way off for Alnylam. The nearly $600 million market capitalization is quite generous for such an early stage drug development company, but then few attract the kind of big pharma partnership interest that has been shown in Alnylam to date. The company may be worth holding with a small portion of one's speculative investment dollars, but only if the investor is willing to ignore the volatility this company will likely experience moving forward and blindly hold -- for perhaps a decade or so. With the recent run-up in share price due to the Merck offer for Sirna, I'd be inclined to wait for a better price before speculating on Alnylam.

Biogen
Idec is a Stock Advisor recommendation. Merck is a former Income Investor selection.

Fool contributor Ralph Casale
holds no financial position in any of the firms mentioned. The Motley Fool has a
disclosure policy.

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