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Byron Research Report onTekmira Pharmaceuticals Corp

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January8,2012
TekmiraPharmaceuticalsCorp.

(TKM-TSX;TKMR-NASDAQ,$4.93)
Rating:SPECULATIVEBUY
Value of siRNA Delivery Platforms Reinforced by
TargetPrice:$12.50
FinancingofEarlyStageU.S.PeerBUY
ChangesToday?
New
Old
U.S.Based siRNA Delivery Platform Firm Solstice Garners Solid
Rating

n/c SPEC.BUY
Support in Recent Financing: Private San Diegobased nucleic acid
Target

n/c
$12.50
formulation
developer
Solstice
Biologics
recently
received
EPS2012E

n/c
($0.43)
EPS2013E

n/c
$0.02
US$18millioninVCsponsoredcapitaltofunddevelopmentofitsown
Revenue2012E(MM)

n/c
$14.4
siRNAdeliveryplatform,astillearlystageplatformcalledRiboNucleic
Revenue2013E(MM)

n/c
$25.1




Neutrals (RNNs). Based on a few technical details we gleaned from
Sharedata
the medical literature and elsewhere, RNNs appear to be single
SharesO/S(MM)


14.0
strandedsiRNAmolecules(forwhichnucleotidesequencevarieswith
MarketCap(MM)


$69.0
EnterpriseValue


$4.0
gene target) that have been chemicallymodified at one or more
NetCash(Q3/12,MM;incnetcashdue
phosphate groups within the RNA; by masking the negative charge
fromAlnylamsettlement)
$65.0
that phosphate groups confer, this facilitates siRNA uptake by cells
Totaldebt(Q3/12,MM)
nil
and tissues. Once inside cells/tissues, esterase enzymes clip off the
FiscalYearend


31Dec
Financials
2012E
2013E
2014E
modification, leaving the nowdelivered siRNA to knockdown target
Revenue(MM)
$14.4
$25.1
$15.4
genes as siRNAs conventionally do. The general approach has
EBITDA(MM)
($6.6)
$1.6
($8.1)
potential, and industry leader Alnylam (ALNY Q) already has a few
EPS(fd)
($0.43)
$0.02
($0.40)
pipeline siRNAs like hemophilia drug ALNAT3 and amyloidosis drug
NetIncome(MM)
($7.5)
$0.5
($9.0)
EV/EBITDA(x)
NA
NA
NA
ALNTTRsc that it modifies at one phosphate group with a trivalent
Company Description: Tekmira is a siRNA (short
galactosebased moiety, recognized by a liver cellspecific receptor
interfering RNA) drug developer, with several
thatpreferentiallytakesupmodifiedsiRNAintolivercellsalone.This
programsusingitsnucleicaciddeliveryplatformLNP
technology is clearly distinct from Tekmira's lipid nanoparticle (LNP)
in clinical trials targeting Ebola infection, TTR
platform that has advanced beyond the proofofconcept stage and
amyloidosis,cancerandhypercholesterolemia.
for which multiple LNPbased siRNAs are welladvanced in Phase I/II
clinicaltrials.
Current Enterprise Value Is Inconsistent with the Value of siRNA
AssetsAlreadyinClinicalTesting:ItistooearlytotellhowRNNwill
compare to LNP as siRNA delivery platforms, and according to
commentary on the Solstice financing in the local San Diego press,
Solstice's nearterm milestones are based more on refining RNN
chemistry than on testing the platform in human studies. However,
weflagthefinancingasapositivesignalonsiRNAperception,atleast

by investors, that they are attractive therapies in medical markets
where gene overexpression is integral to disease pathology, and on
Source:Bigcharts.com
recognitionofthenecessityforwellcharacterizeddeliveryplatforms
(of whichLNP is the most clinicallyadvanced) to drive siRNA uptake
bytargetcellsandtominimizedegradationbeforehand.Wealready
knowthatLNPdoesthiswithgreatbenefit,asrecentPhaseI/IIdata
forclinicalcandidatesALNPCSandTLNTTR02(andprimatedatafor
TKMEbola) attests. Even with the distraction of litigation with MA
based partner Alnylam now resolved, and with US$75 million (plus
Q3/12cashof$5.6million,lessatleastUS$15.7millionincontingent
legalfees)owedtoTekmirathisyearundertheAlnylam settlement,
TKM shares are trading at an implied enterprise value of only
$4.0million, a level that in our view dramatically undervalues the
DouglasW.Loe,Ph.D.MBA
Healthcare&Biotechnology
647.426.0472
Pleaseseeendofthisreportforimportantdisclosures
DLoe@byroncapitalmarkets.com


TekmiraPharmaceuticalsCorp.
firm'salreadywelladvancedsiRNApipeline,whichincludesnotonlythethreePhaseI/II
stage candidatesmentioned above, but alsooncology leadTKMPLK1 that is on pace to
generatefinalPhaseIdataandadvanceintoPhaseII(probablyinlivercancer)byyearend
2013.Oncashvaluepersharealone,TKMwouldbevaluedat$4.64/sh.
Exhibit1FinancialSummaryforTekmira
(US$000,exceptEPS)
2011A
2012E
2013E
2014E
2015E
2016E
2017E
2018E
Royaltyrevenue,Alnylanprograms
0
0
0
0
881
3,386
7,885
25,242
Royaltyrevenue,Tekmiraprograms
0
0
0
0
0
30,898
31,670
40,696
Royaltyrevenue,Marqibo
0
0
605
1,861
2,543
3,649
3,741
3,834
R&D/milestones,otherrevenue
16,647
14,368
24,500
13,500
16,000
18,500
20,500
15,500
Totalrevenue
$16,647
$14,368
$25,105
$15,361
$19,424
$56,433
$63,796
$85,272
Prodrevgrowth(%)
(22%)
(14%)
75%
(39%)
26%
191%
13%
34%
R&Dexpense
19,899
15,000
17,500
17,500
20,000
20,000
20,000
15,000
EBITDA
($9,565)
($6,632)
$1,606
($8,140)
($6,576)
$30,436
$37,796
$64,273
EBITDAmargin(%)
NA
NA
6.4%
NA
NA
53.9%
59.2%
75.4%
Netincome(loss)
(9,937)
(7,532)
459
(9,040)
(7,476)
19,198
23,982
41,192
EPS(basic,fullytaxed)
($0.82)
($0.54)
$0.02
($0.48)
($0.39)
$1.01
$1.26
$2.17
EPS(fd,fullytaxed)
($0.71)
($0.43)
$0.02
($0.40)
($0.33)
$0.85
$1.06
$1.82
P/E
NA
NA
254.1x
NA
NA
6.1x
4.9x
2.8x
EV/EBITDA
NA
NA
12.6x
NA
NA
0.7x
0.5x
0.3x
Source:ByronCapitalMarkets,Tekmira
TKMTradingatLevelsAscribingVirtuallyNoValuetoWellAdvancedsiRNAPipeline:As
weindicatedpreviously,webelieveTekmira'ssiRNApipelineisdramaticallyundervalued
bythecapitalmarketsatcurrentpricelevels,particularlywhenconsideringthereduction
infinancialriskthattheNov/12Alnylamsettlementconfers.Tosummarize:
o Itisofcoursepossiblethatthecapitalmarketsdonotyetascribevaluetofuturecash
payments owed by Alnylam, at least until they are formally reported on the balance
sheet,butweseelittleriskthatAlnylamwillnotupholditslegalobligationtoprovide
TekmirawithUS$65millioninupfrontcapital(likelypaidinlateNov/12asperTekmira's
Nov 12/12 press release) and another US$10 million before the end of F2013 when
Alnylam advanced two LNPbased siRNA (amyloidosis drug ALNTTR02 and oncology
drug ALNVSP) into formal clinical trials in China. Tekmira will of course need to pay
contingencyfeestoitsMassachusettslegalcounselofatleast$15.7million(asdisclosed
in its Q3/12 MD&A), but taking all cashaltering variables above and adding this to
Tekmira'sQ3/12cashbalanceof$5.6million(weexcludeprobableQ4/12cashburnof
$2million$2.5millionfromthisanalysis),wederiveproformaadjustedcashbalance
of$65million,or$4.64/sh,closetocurrentsharevalue.
o Accordingly,thecapitalmarketsareascribinglittlevaluetoTekmira'ssiRNApipeline,
which has advanced well beyond the proofofconcept stage and has already
performed well in several human or nonhuman primate studies, greatly reducing
developmentrisknotonlytosiRNAandtoLNP,buttothedrugcandidatestowhich
clinical data apply. Relevant Phase I/II data includes, but is not limited to: positive
Phase I TTRamyloidosis data from Alnylam for ALNTTR02 as reported in Jul/12,
positive Phase I hypercholesterolemia data reported by Alnylam for ALNPCS in
Jan/12, and positive primate data reported by Tekmira and its U.S. government
collaboratorsforTKMEbola,thereafterpublishedintheLancetin2010.
o Moreover,thecapitalmarketsareascribingvirtuallynovaluetofutureroyaltiesthat
we project Tekmira will receive for longstanding liposomal vincristine formulation
Marqibo (originally called ONCOTCS when tested in advanced nonHodgkin's
lymphoma by Inex years ago). Partner Talon Therapeutics (TLON Q) received FDA
DouglasW.Loe,Ph.D.MBA 647.426.0472 DLoe@byroncapitalmarkets.com
Page|2

TekmiraPharmaceuticalsCorp.
approval in a niche cancer market (Philadelphia chromosomenegative acute
lymphoblastic leukemia, or ALL) for this drug in Aug/12, for which we project peak
annualroyaltyrevenue(andEBITDA)toTekmiraof$3.5million$4million.Timelines
to achieving peak annual royalties clearly await completion of Talon's nowpublic
intention to identify strategic partners or acquirers for the firm, but we believe
interested parties once identified will regard Marqibo as a core commercial asset
withinTalon'sdrugportfolio.
o Weheavilydiscountpreclinicaldrugassetsinpubliccompanyvaluation,butTekmira
does have a pipeline of wellvalidated earlystage siRNA candidates targeting
indications amenable to siRNAbased drugs and which could directly impact our
valuationonceformalhumantestingcommences.Relevantprogramsarefocusedon
siRNAs targetingthe aldehyde dehydrogenase 2 gene (ALDH2) in alcohol dependent
subjects (preclinical data show substantial gene knockdown with LNPformulated
genespecific siRNAs) and cell cycleregulating genes WEE1 and CSN5 (not as well
validated and oncology is a highrisk medical market, but certainly one that is
amenabletosiRNAapproachestotherapy).
Exhibit2-ValuationScenariosforTekmira
NPV,discountrate
10%
20%
30%
40%
50%
60%
Impliedvaluepershare
$59.31
$28.58
$14.72
$8.00
$4.53
$2.64
Discountedsharepriceyearend2013
Price/earningsmultiple,F2018
P/E
10%
20%
30%
40%
50%
60%
Impliedshareprice1
10
$12.40
$8.76
$6.36
$4.73
$3.59
$2.77
20
$24.80
$17.52
$12.72
$9.46
$7.18
$5.54
30
$37.20
$26.28
$19.08
$14.19
$10.77
$8.31
EV/EBITDAmultiple,F2018
5x
10x
12.5x
15x
20x
25x
Impliedshareprice1
$4.65
$8.47
$10.38
$12.29
$16.10
$19.92
OneyearTekmiratargetprice
$12.60
1 BasedonF2018EPSforecastof$1.82;EBITDAof$64.3M;NPVdiscountedat30%

Source:ByronCapitalMarkets,Tekmira
Summary and Valuation: Based solely on valuing future free cash flow generation by
Tekmira's siRNA pipeline and its newly FDAapproved liposomal vincristine drug Marqibo,
we continue to rate TKM/TKMR a SPECULATIVE BUY, with a oneyear target price of
$12.50.
OurvaluationisbasedonanaverageofNPV,20xEPSand12.5xEV/EBITDA,using
F2018asthereferenceyearandincorporatinga30%discountrateinallvaluationmethods.
InF2018,weprojectconsolidatedroyaltyrevenuefromallapprovedsiRNAsandMarqiboof
$85.3million,EBITDAof$64.3millionandfullytaxed,fullydilutedEPSof$1.82.
Independently,Alnylamprovideditsownpipelineupdatethisweek,inwhichitsolidified
its intention to advance ALNTTR02 into formal Phase III TTR amyloidosid testing by
Q4/13, as our model currently assumes. The main competitor to ALNTTR02 would be
Pfizer's TTR misfolded proteintargeted tafamadis formulation Vyndaqel, for which E.U.
approvalwasgrantedinNov/11butFDAapprovalwasnotrecommendedbyanadvisory
panel(134vote)inJun/12.ALNPCSwasnotspecificallymentionedinthe update but
Alnylam disclosed previously that it will not advance into Phase II hypercholesterolemia
testing without tangible partnership interest, which we are cautiously optimistic could
materializethisyear.Thetargetgeneitself,PCSK9,iswellvalidatedandtargetedbyNY
based peer firm Regeneron (REGN Q) with its antibody drug REGN727, which already
generated positive Phase II data from a 77patient trial in Q2/12, in a comprehensive
DouglasW.Loe,Ph.D.MBA 647.426.0472 DLoe@byroncapitalmarkets.com
Page|3

TekmiraPharmaceuticalsCorp.
PhaseIIIclinicalprogram,whichincludestheongoing471patientODYSSEYFHItrial,the
250patient ODYSSEY Alternative trial, the 660patient ODYSSEY Combo II trial, and the
2,100patient ODYSSEY LongTerm trial, all on pace to generate blood lipid data by
2014/15 (a separate 18,000patient postacute coronary syndrome trial called,
predictably,theODYSSEYOutcomestrial,couldgeneratedataby2018).
Asaseparateobservation,weareabitsurprisedthatwithsomuchofTekmira'scurrent
marketvaluederivedfromAlnylamcashobligations,thatAlnylamhasnotbidtoacquire
Tekmiraatsomepremiumtocurrentlevels(wewouldofcourseregardabidatornear
our oneyear target price to be reasonable). We have no direct insight on Alnylam's
acquisition strategy in general, but it is a verifiable observation that LNPformulated
siRNAscontinuetobeprominentinitsclinicalpipelineevenwhileitcontinuedtoworkon
livertargetedtrivalentNacetylgalactosamineconjugatedsiRNAcandidatesinparallel;as
the settlement implies, Alnylam considers LNP to be worth at least US$75 million, and
Tekmira'smarketvalueiscurrentlybelowthatthreshold.
Exhibit3-siRNAPipelineforTekmira,IncludingAlnylamPartneredPrograms
Patient
Clinicalprogram
Research
Preclinical
PhaseI
PhaseII
Targetgene
number1
Partner
siRNAprogramsoverseenbyTekmiraorpartnerAlnylam
Solidtumors
Pololikekinase1
42
PhaseIadvancedsolidtumorstudystarted
TKMPLK1
inJan/11;interimdatabyH2/12;PhaseIIcould
startin2013
Ebolainfection
EbolaLpolymerase,
56
Datafromnonhumanprimatetrialshowedviral
TKMEbola
VP24,VP35viralproteins
protectionpreorpostexposure;newPhaseI
shouldstartinH2/13
Livercancer
Kinesinspindle
41
PhaseIcompeltedinAug/11;clinicalbenefit
ALNVSP
protein&VEGF
rateof42%overaveragedurationof5mo;should
startPhaseIItestinginChinainH2/13
TTRmediatedamyloidosis
Transthyretingene
36/17
PhaseItrialstartedinJul/10,finalsafetyand
ALNTTR01/02
(thyroxinetransporter)
tolerabilitydatareportedinQ2/12;datafrom
17patientPhaseI'TTR02trialreportedinQ3/12
PhaseIIITTRamyloidosistrialplannedforQ4/13
Hypercholesterolemia
PCSK9(proproteincon
32
PhaseItrialstartedinSept/11,finalsafetyand
ALNPCS
vertasesubtilisinkexin9
tolerabilitydataexpectedinH2/12;partnership
interestdesiredbeforemovingintoPhaseII
Hemophilia
ActivatedproteinC(inact
NA
ReducedAPCmRNAby75%inpreclinicaltrials
ALNAPC
ivatesFactorsVa&VIIIa
PhaseIwasplannedforH1/13,butAlnylamnow
morefocusedonALNAT3antithrombin
Programoverseenbypartner
ProgramoverseenbyTekmira 1 TotalpatientstreatedinPhaseI/II,plustargetpatientenrollmentforongoingtrials

Source:ByronCapitalMarkets,Tekmira


DouglasW.Loe,Ph.D.MBA 647.426.0472 DLoe@byroncapitalmarkets.com
Page|4

TekmiraPharmaceuticalsCorp.
IMPORTANTDISCLOSURES

Analyst'sCertification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the
subjectsecuritiesorissuers.Nopartofthecompensationoftheresponsibleanalyst(s)namedhereinis,orwillbe,directlyorindirectly,
related to the specific recommendations or views expressed by the responsible analyst(s) in this report. The particulars contained
hereinwereobtainedfromsourceswhichwebelievetobereliablebutarenotguaranteedbyusandmaybeincomplete.

ByronCapitalMarketsLtd.("Byron")isaMemberofIIROCandCIPF.Byroncompensatesitsresearchanalystsfromavarietyofsources.
The research department is a cost centre and is funded by the business activities of Byron including institutional equity sales and
trading,retailsalesandinvestmentbanking.Sincetherevenuesfromthesebusinessesvary,thefundsforresearchcompensationvary.
Noonebusinesslinehasgreaterinfluencethananyotherforresearchanalystcompensation.

DisseminationofResearch
Byron endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients. Byron equity research is
distributedelectronicallyviaemailandispostedonourproprietarywebsitetoensureeligibleclientsreceivecoverageinitiationsand
ratingschanges,targetsandopinionsinatimelymanner.Additionaldistributionmaybedonebythesalespersonnelviaemail,faxor
regularmail.Clientsmayalsoreceiveourresearchviaathirdparty.

CompanySpecificDisclosures:
1
None

InvestmentRatingCriteria
STRONGBUY
The security represents extremely compelling value and is expected to appreciate significantly from the

currentpriceoverthenext1218monthtimehorizon.


BUY
Thesecurityrepresentsattractivevalueandisexpectedtoappreciatesignificantlyfromthecurrentpriceover
thenext1218monthtimehorizon.


SPECULATIVEBUY
The security is considered a BUY but in the analyst's opinion possesses certain operational and/or financial
risksthatmaybehigherthanaverage.


HOLD
Thesecurityrepresentsfairvalueandnomaterialappreciationisexpectedoverthenext1218monthtime
horizon.


SELL
Thesecurityrepresentspoorvalueandisexpectedtodepreciateoverthenext1218monthtimehorizon.

OtherDisclosures
ThisreporthasbeenapprovedbyByronfordistributioninCanadafortheuseofByron'sclients.Clientswishingtoeffecttransactions
inanysecuritydiscussedshoulddosothroughaqualifiedByronsalesperson,registeredintheirjurisdiction.

InformationalReports
From time to time, Byron will issue reports that are for information purposes only, and will not include investment ratings. These
reportswillbeclearlylabeledasappropriate.

DouglasW.Loe,Ph.D.MBA 647.426.0472 DLoe@byroncapitalmarkets.com
Page|5

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