By Richard Gill CFA

In our initiation of coverage report on AIM listed RNA therapeutics specialist Silence Therapeutics (SLN) we highlighted the firm’s potentially valuable patent portfolio. Realising that value for shareholders might have come one step closer after the firm announced last week that it has issued a claim in the UK High Courts of Justice (Patents Court) against Alnylam UK Limited, Alnylam Pharmaceuticals Inc and The Medicines Company UK Limited. Alnylam Pharmaceuticals (ALNY) is a NASDAQ listed RNAi development company currently valued at $7.8 billion, and is largely considered to be the market leader in GalNAc technology.

The claim asks the Court to determine whether Silence is entitled to “supplementary protection certificates” (SPCs) on several late stage Alnylam products including Patisiran, Fitusiran, Givosiran and Inclisiran (partnered with The Medicines Company). SPCs are intellectual property rights which can give up to 5 years of exclusivity after a patent expires, so if the claim is successful this could result in the extension of Silence’s European patent protection on these products – most of Silence’s original core patent estate relating to chemical modification technology begins to expire in 2023 so the SPCs would extend protection to 2028 in the EU.

For some time Silence has hinted in its stock market statements that some of its competitors would require licences under its patent portfolio, with CEO Ali Mortazavi commenting, “we consider potential licences under our patent estate could have a significant financial effect relative to the current market capitalisation of Silence.” Thus far those comments appear to have been given scant regard by the market but the writ issuance last week should give the market pause for thought on the lowly valuation that is currently ascribed to the stock.

Granting a licence to those companies using protected IP is typically how these cases are settled in the pharma industry, with royalties received dependent on factors including how advanced the particular drug using the IP is. We note that the four products mentioned above are all at a late stage of clinical development:  initial Phase 3 results for Patisiran will be announced in September 2017, Fitusiran has just initiated a Phase 3 study (with positive Phase 2 extension results announced yesterday), and both Givosiran and Inclisiran are expected to commence Phase 3 studies during 2017 giving the potential for higher royalties to be received by Silence and significant potential value to be created should they be approved for sale. To highlight the potential value to Silence Ali Mortazavi recently told The Sunday Times that potential payout could be in the “hundreds of millions of pounds” if the drugs are approved. However, Alnylam intends to “vigorously” defend any legal action.

Previously, Quark Pharmaceuticals was granted a royalty and milestone licence under the same patent estate for certain products currently in Phase 2 and Phase 3, which are partnered with Novartis. Readouts from the Phase 2 study in Acute Kidney Injury are expected in 2017, and from the Phase 3 Delayed Graft Function study in H2 2018. Importantly, the licence to Quark was granted at a pre-clinical stage in 2005, whereas the medicines for the four above listed conditions are in late-stage clinical development

Low enterprise value puts Silence in play

Despite the confirmation of the legal claim there has been no real reaction from the markets since then in terms of share price movement. Silence shares have however moved up from c.5 year lows of 72.875p seen in May to 97.75p as we write, capitalising the company at £68.42 million.

The last reported net cash figure (as at 31st December 2016) was £39 million, which rises to c.£43.3 million if we add in the value of Silence’s stake in US listed Arrowhead Pharmaceuticals (ARWR.NASDAQ). Thus, the markets are valuing the Silence Therapeutics business, which incorporates the valuable intellectual property portfolio (and the “hundreds of millions of pounds” licence potential) along with Silence’s growing GalNAc drug development pipeline, at just £25.12 million. Plain wrong in our opinion hence our Conviction Buy stance coverage initiated HERE.

In terms of the patent claims, we expect that we could have a decision from the courts in the second half of 2018, dependent on any appeals. Looking at Silence’s current valuation, and Alnylam’s vast $962 million of cash as at 31^st March 2017, we also believe that buying out Silence could be a sensible strategic move by the NASDAQ listed firm and a scenario that cannot be ruled out.

We believe that as newsflow emerges over the next 12 months there could be a return of multiples of the present price and a very real possibility of being acquired with downside cushioned by the cash pile. We retain a Conviction Buy stance.

DISCLOSURE & RISK WARNING

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• Silence Therapeutics