Summary: Denali Therapeutics (NASDAQ: DNLI) and Alector (NASDAQ: ALEC) are two high-profile companies taking a new angle on neurodegenerative diseases like Parkinson’s and Alzheimer’s Disease (PD & AD), notoriously tough nuts to crack. We are cautiously excited about a handful of innovative companies including the two highlighted here (we also previously wrote about Passage Bio (NASDAQ: PASG), a gene therapy CNS player we took a position in).
ALEC leverages association studies to identify genetic targets and biomarkers for immuno-neurology therapies. DNLI also takes a genetically-driven approach to target selection, and possesses a proprietary blood-brain barrier (BBB) transport platform. A look at their pipelines reveals some overlapping targets (progranulin in FTD, TREM2 in AD), reflecting the similar philosophical starting point for these companies. This article will focus on the case for and against ALEC.
ALEC does not provide sufficient value at $32.70 with a market cap of ~$2.6B given a 12 month target price of $25 - 30.
While ALEC has strong peak sales potential, probability of technical and regulatory success is low. While we model ~$1.2B in peak sales potential for AL001 (~$550M in FTD-GRN and ~$700M in FTD-C9orf72), we assign the FTD-GRN and FTD-C9orf72 indications a probability of approval of ~15% and ~10% respectively. We assess a probability of technical and regulatory success (PTRS) of ~10% for their AbbVie-partnered AD portfolio (peak sales of ~$10B, 50% of which goes to ALEC). After accounting for the 50:50 AbbVie profit split, the PTRS-adjusted peak sales for ALEC across their lead programs (i.e., programs with or expecting first clinical data this year) is ~$735M. Additional upside may be driven by AL101 and other earlier-stage programs. We believe this is a generous assessment of their pipeline PTRS and does not fully capture execution risk, competitive dynamics, and underlying clinical uncertainties.
In our assessment, we believe that ALEC should be priced between $25 - 30 per share. Applying a peak sales multiple of 3.5 - 4x, we forecast a risk-adjusted valuation of $2.8B in 2024 midyear when AL001 is expected to be under regulatory evaluation / near-launch and the AD assets in pivotal trials, against the current market cap of $2.6B. Using a discount rate of 11 - 13%, this translates to a 12-month price target of $25 - 30, representing ~25% downside over the current price of $32.70. However, given the number of potential inflection points (and fairly low bar for success given the use of biomarker endpoints in early stage trials and need for therapies) we would not be surprised if the market continues to reward ALEC despite the underlying concerns we have.
While we do expect ALEC price movement driven by pipeline advancement in 2020, on a risk-adjusted basis we would not expect ALEC to hold onto these gains in the long run. We would caution from indexing too heavily on P1/2 biomarker data as a derisking signal for pivotal development: it remains unclear the extent to which efficacy along these biomarkers will correlate with clinically meaningful impacts given the sheer complexity of neurodegeneration and cognitive function/decline.
The Case for ALEC:
Multiple near-term inflection points in 2020: ALEC is expected to report data in the coming weeks from their P2 trial for lead asset AL001 in FTD patients with GRN and C9orf72 mutations. Key data to look out for (beyond the usual safety and PK) are impact on neurofilament light (NfL), a biomarker for neurodegeneration, and volumetric MRI (vMRI), a biomarker for brain atrophy. In P1 trials, AL001 restored plasma and CSF PGRN levels back to the normal range, a positive signal of drug activity, and reduced plasma NfL by an average of 14%. Additionally, P1b data in mild-moderate AD patients is expected for AL002 and AL003 this year, with AL002 expected to move to P2 by EOY (programs partnered with AbbVie).
Extremely strong leadership team and scientific advisory board, large industry partnership, and strong cash position: ALEC boasts an experienced leadership team and prestigious scientific advisory board. While this is no guarantee for success, a company’s ability to get thought leaders to sign on does provide some signal to potential investors that there is scientific and clinical promise. Along the same lines, we consider ALEC’s large collaboration with AbbVie on their AD programs ($205M upfront for ALEC) a similar positive signal. Moreover, ALEC remains well-funded with ~$550M in cash, cash equivalents, and marketable securities.
ALEC is the development leader in FTD-GRN: ALEC is in the pole position in FTD-GRN, though a number of competitors are poised to enter the clinic including DNLI and multiple gene therapy players (PASG, PRVL). FTD-GRN constitutes 5 - 10% of the 50 - 60 K FTD cases in the U.S., or about 3 - 6 K patients. C9orf72 variants are estimated to occur in 7 - 12% of FTD cases (4 - 7 K patients). ALEC will get to take the first shot at helping this high need population. We model approximately ~$1.2B in peak sales potential for AL001 (~$550M in FTD-GRN and ~$700M in FTD-C9orf72). However, we also note that the scientific rationale for AL001, which promotes circulating levels of PGRN by downregulation of the SORT1 degradation pathway, is less clear in the larger FTD-C9orf72 patient population.
Multiple shots on goal in AD in early-stage clinical trials with first clinical data expected this year: Both AL002 and AL003 target pathways implicated in AD and are in early stages of clinical development, providing ALEC two bites at the apple with P1 proof-of-mechanism data expected in 2020. Our back-of-the-envelope directional peak sales estimate for ALEC’s Alzheimer’s franchise is ~$10B (non-risk adjusted). ALEC is entitled to 50% of global profits. If Biogen’s aducanumab is rejected, this number could conceivably climb even higher.
The Case Against ALEC:
Clinical relevance of AL001’s demonstrated impact on biomarkers is unclear: The P1 data for AL001 showed a 14% decrease from baseline in NfL plasma levels in the 5 patients available for assessment at 3 months: it is unclear if this is will prove to be clinically meaningful in FTD (for some context, disease-modifying MS therapies appear to reduce NfL by 20 - 40% after several months to years on therapy). FTD patients tend to have on average upwards of 5-7x NfL levels compared to healthy controls, so the extent to which a 14% reduction will be correlated with a clinically meaningful slowing of the neurodegenerative process is far from certain.
The strength of the scientific rationale for their lead programs is variable: AL001 increases PGRN by downregulating SORT1, a degradation pathway for PGRN. Early data suggests AL001 efficiently increases PGRN to normal levels, a positive indication of drug activity. However, systemic upregulation of PGRN via suppression of SORT1 may present oncogenic risks. Progranulin and its bioactive fragments are noted to be overexpressed in many cancer types. Castration-resistant prostate cancer is associated with sortilin loss and overexpressed progranulin: this is the exact pathway that AL001 modulates. Furthermore, we are also generally hesitant about AL002, which targets TREM2 in AD. TREM2’s role in neurodegeneration is complex, with differing signals suggesting it may be up- or down-regulated at different points in the disease course, which leads us to take a pessimistic view regarding its potential as a drug target in AD. AL003 inhibits SIGLEC3, a unique mechanistic approach in AD.
Repeated systemic administration of biologics may present implementation barriers in the real-world for patients with neurodegeneration: ALEC’s portfolio consists of antibodies, which may require that patients come to clinics to receive infusions. Considering the specific makeup of their target population (i.e., patients with declining cognitive function and corresponding behavioral issues and confusion), we could foresee maintaining patient compliance being challenging. We thus would predict clinical preference for a single-administration therapy (a gene therapy) or orally-delivered small molecule if possible. We would expect disproportionate Medicare representation for neurodegeneration (though not so much for FTD-GRN, an earlier-onset disease)- the introduction of step edits on Medicare Part B could feasibly even allow for a step edit through oral agents given the potential cost savings (assuming an oral is lower cost, particularly from a total cost of care perspective).
We do not own shares of Alector or Denali Therapeutics. This article expresses our own opinions, not Alector’s, Denali’s, or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the companies mentioned in this report.