Arrowhead Pharmaceuticals (ARWR) is close to its most attractive price since mid-2020. This makes it a good time to assess the business for its future potential. Since Arrowhead is a clinical-stage biotech company (no FDA-approved drugs yet) developing new therapies, it comes with risks. It also has a market cap of nearly $6.0 billion, a hefty sum for a company that isn’t guaranteed to get therapies approved by regulators. This article will focus on the potential of the Arrowhead pipeline. Although Arrowhead has not yet completed a clinical program, I believe its RNAi therapy platform has been de-risked by FDA approval of other RNA therapies by companies like Alnylam (ALNY) and Ionis (IONS) . I believe it is likely that by the end of this decade, Alnylam could have several commercial RNAi therapies generating substantial total revenues. In the meantime, it is also possible that it will be taken over by one of the large diversified pharmaceutical companies, as happened with its rival Dicerna (DRNA). Dicerna became one of my best performing stocks in 2021 when it was acquired by Novo Nordisk (NVO).
ARO-APOC3 for Familial Chylomicronemia Syndrome
On January 12, 2022, Arrowhead announced that it had initiated a Phase 3 study of ARO-APOC3 for FCS (familial chylomicronemia syndrome), a lipoprotein lipase deficiency that results in very high triglycerides in the blood. ARO-APOC3 inhibits the production of apolipoprotein C3, a regulator of triglyceride metabolism. The disease itself is rare, but ARO-APOC3 is also being tested in patients with SHTG (severe hypertriglyceridemia) and in a phase 2b study in patients with mixed dyslipidemia. While I do not consider the potential revenue from chylomicronemia to be significant, a successful Phase 3 trial followed by regulatory approval in this indication would pave the way for label expansion into other indications. Additionally, it will compete with Ionis’ Waylivra (Volanesorsen), which was approved for FCS in the European Union in 2019 and generated less than $15 million in revenue in Q3 2021.
The latest data for ARO-APOC3 was presented to the American Heart Association in November 2021 and was encouraging. The drug reduced APOC3 by 98% and triglycerides by 91%. Security seems good.
ARO-HSD licensed from GlaxoSmithKline
Arrowhead was able to fund itself in part by licensing some of its potential therapies. At the end of November 2021, it granted an ARO-HSD license to GlaxoSmithKline (GSK). Arrowhead will receive $120 million upfront (likely in the first quarter of 2021) and could receive an additional $30 million if a phase 2 trial is started and another $100 million if a phase 3 trial starts. Then $190 million if sales start, plus tiered royalties.
ARO-HSD is being tested for the treatment of NASH (non-alcoholic steatohepatitis), a liver disease that has proven difficult to treat with medication. If approved by regulators, it could have a huge number of patients as it affects more than 3% of the adult population in the United States. Annual revenue could well exceed $1 billion, generating substantial royalties for Arrowhead. Not to get too excited about this, we have yet to see data from the ongoing phase 1 trial.
The Phase 2/3 SEQUOIA trial, a potentially pivotal registrational study of ARO-AAT, completed its Phase 2 enrollment in July 2021. Patients receive approximately 2 years of treatment. ARO-AAT is a second-generation therapeutic RNAi administered subcutaneously for a rare genetic liver disease associated with alpha-1 antitrypsin deficiency. RNAi treatment is co-developed with Takeda Pharmaceutical (NYSE:TAK) as TAK-999. Arrowhead is to receive an upfront payment of $300 million and potential milestones, as well as royalties. The therapy has received orphan and accelerated designation by the FDA and orphan designation in the EU. Interim data from a separate open-label study were released in November at the annual meeting of the American Association for the Study of Liver Diseases.
AATD, or alpha-1 antitrypsin deficiency, is rare and affects around 1 in 2,500 people of European descent. It is not a quick killer, but smokers of it have an average life expectancy of only 50 years. A highly effective drug would trigger orphan drug pricing, which could generate substantial revenue. Novo Nordisk gained a competing pipeline candidate with its acquisition of Dicerna. So there’s a race to deal with the AATD, and there’s no guarantee that Arrowhead will be the winner, although it appears to be ahead of its trial schedule.
In November 2021, new clinical data on JNJ-3989 (AASLD abstracts, page 17) for hepatitis B was presented by Janssen. The results were positive, with a dose-dependent response. Arrowhead has licensed RNAi therapy to Janssen, a division of Johnson & Johnson (JNJ). In August 2020, Arrowhead presented JNN-3989 Phase 2 data suggesting that, when combined with the nucleoside analogue JNJ-6379, the therapy has the potential to provide a functional cure for chronic hepatitis B. 48 weeks after the last dose, 39% of patients had trough levels of HBV surface antigen. Chronic HBV affects approximately 390 million people worldwide, although a vaccine has been available since 1991. A common treatment is Viread [by Gilead (GILD)], now also available as a generic drug, but it is not a cure.
As part of the October 2018 deal with Janssen, Arrowhead received $175 million upfront and a capital investment of $75 million. Arrowhead became eligible to receive an additional $3.5 billion in milestone payments, of which $1.6 billion is related to the HBV license and $1.9 billion is for option and milestone payments for up to 3 additional RNAi therapies developed for Janssen’s chosen targets. Arrowhead is also eligible for royalties if there are commercial sales, but the percentage range was not given.
A separate investigational therapy, JNJ-75220795, was recently licensed by Arrowhead to Janssen as a potential treatment for NASH. A $10 million milestone payment was made for Phase 1 study work.
AMG 890 or Olpasiran reduces the production of apolipoprotein A, a key component of lipoprotein(A), which is genetically linked to an increased risk of atherosclerosis and associated cardiovascular disease. This risk is independent of cholesterol and LDL levels, so it is still there even when cholesterol is successfully lowered. Amgen (NASDAQ:AMGN) acquired an exclusive worldwide license from Arrowhead in September 2016. Atherosclerosis is one of the most common forms of heart disease, affecting almost everyone over the age of 65 to some degree. To be a success, the AMG 890 would have to reduce lipoprotein(A) significantly more than niacin, which can offer a 20% to 30% reduction, and which has side effects at an effective dose. Data from the phase 2 study are expected in the first half of 2022.
Due to the potential size of the market, AMG 890 could be a blockbuster if approved by regulators. Solid Phase 2 data could significantly increase Arrowhead’s perceived value. However, consider Amgen’s Repatha experience. This PCSK9 inhibitor, which lowered cholesterol levels in hard-to-treat patients, was brought to market in 2015. Revenues for the drug grew much slower than expected due to resistance from insurers.
Third quarter 2022 results and cash trail
Noting that for the Arrowhead timeline, Q3 is fiscal Q4, net loss for the quarter was $141 million or $1.36 per share, a fairly large loss for a company of this size. Still, the cash and cash equivalents balance fell just $32 million sequentially to $645 million. The consumption rate will fluctuate from quarter to quarter due to widely varying license milestone payments. When the December 2021 quarter is released, we will likely have some indication of the extent of the cash trail.
In addition to the most advanced drugs mentioned above, Arrowhead has an extensive drug pipeline and the ability to generate more candidates from its RNAi platform. The basic idea of RNA interference for therapies has now been validated by several drugs. So hopefully it’s now a matter of awaiting crucial Phase 3 results which should lead to commercial sales, if positive. Meanwhile, the cash position looks good despite the high spend rate, as cash is being raised through more transactions and steps, rather than issuing new shares.
As I described above, some of the potential therapies are aimed at smaller, or even orphan drug markets, and therefore may not generate much revenue. Others like Olpasiran and JNJ-3989 could serve massive markets. It is also difficult to predict how Arrowhead products will perform against their competitors. We just have to wait for the clinical results. Based on the positive trial data so far, the approval and commercialization of other RNAi therapies, and the total size of the potential markets, I suspect Arrowhead will eventually see royalties and sales revenue well more than $1 billion a year in its future. . The timing is hard to predict, but 2025 to 2027 for a major revenue boost seems possible. Given that the stock price of $57.81 is now near a 52-week low, it seems like a good time to accumulate the stock. This assumes you are a long-term investor and understand the risks. A short-term jaunt could come from an acquisition, as happened with rival Dicerna in 2021.