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$ARWR - Arrowhead Pharmaceuticals

  • Down ~30% Due to Misinterpreted Data.

  • Johnson & Johnson (NYSE: JNJ) and Janssen Pharmaceuticals Deal to Provide $175M Cash Upfront and $75M in Equity Investments.

  • Potential $3.5B in Milestone Payments and Potential Further Royalties on Commercial Sales.

  • Presenting Late Breaking Clinical Data at AASLD Liver Meeting on November 12th.

Last month, shares of Arrowhead Pharmaceuticals (ARWR) saw a year to date growth in their share price of over 400%, increasing from $3.70 at the start of January to more than $19.00 at the end of September.  However, the stock saw a large pullback in early October due to misinterpreted data and actions by the company.  On October 4th, Arrowhead entered into a $3.7B license and collaboration agreement with Johnson & Johnson's (JNJ) Janssen Pharmaceuticals.  While I believe this deal is the best step forward for the company, the share price reflects an investor sentiment that Arrowhead got the short end of the stick on the deal and the company could profit more in the long run had they kept the global licensing for themselves.  

The Deal

Under the agreement, Arrowhead received a $175M upfront payment from Janssen and a $75M equity investment at a price of $23 per share from Johnson & Johnson Innovation.  The agreement also states Arrowhead has potential to receive an additional $3.5B in milestone payments, as well as further royalties on commercial sales from Janssen as they received the worldwide exclusive license for ARO-HBV with the ability to collaborate with Arrowhead Pharmaceuticals on up to three new RNA interface (RNAI) therapeutics against targets.  The upfront payment, equity investments, and additional milestone payments combine to provide Arrowhead Pharmaceuticals a total potential value of over $3.7B.

Broken down, the company is eligible to receive up to roughly $1.6B in payments for the HBV license agreement with Janssen, which stipulates a $50M milestone payment linked to one of their Phase II studies. Additionally, Arrowhead is eligible to receive up to $1.9 billion in option and milestone payments for the RNAi collaboration agreement. Lastly, Arrowhead is eligible to receive royalties that extend up into the mid teens in relation to commercial sales down the road. 

While Arrowhead has potential for large payments down the road and attractive royalties, Janssen does hold the worldwide exclusive license to the ARO-HBV program, Arrowhead’s drug candidate for treating chronic hepatitis B infection. Conversely, Arrowhead’s ongoing study of ARO-HBV will be taken over by Janssen for clinical development and commercialization.  This is great news as the R&D, commercialization, and marketing costs will solely fall into the hands of Janssen while Arrowhead receives royalties on the back end.  Further reducing costs, worked into the deal is the ability of Janssen to select up to three brand new targets for Arrowhead to develop clinical candidates for utilizing the TRiM™ platform. Arrowhead will perform all steps required for developing the drug candidates, but the process will be entirely funded by Janssen up until the point the company is prepared to file an IND application.  At this point, Janssen can choose whether or not to take exclusive licensing on the drug candidate, if not then Janssen will hold responsibility for further development and commercialization. 

AASLD Liver Meeting Presentation

On November 12th, 2018, Arrowhead Pharmaceuticals is presenting late breaking data at the American Association for the Study of Liver Disease (AASLD) Liver Meeting in regards to their ARO-HBV and ARO-AAT Phase I studies.

ARO-HBV 

RNAi has indicated potential as a treatment option for patients with chronic hepatitis B based on its ability to silence HBV mRNA thereby reducing all viral products, most notably HBsAg.

Fortunately there were no serious adverse effects or dropouts in normal, healthy volunteers or patients with chronic hepatitis B reported to date. AEs were mild and similar in occurrence for active or placebo.  Results showed that patients (n=16) who received monthly doses x 3 of 100, 200, 300 or 400 mg of ARO-HBV, 14 were BLQ (HBV DNA was present but below the quantification limit) for HBV DNA and 13 were HBeAg negative at baseline.

All patients that reached day 85 in the study were shown to have > 1.0 log10 reduction in HBsAg with additional HBsAg decreases observed after the second and third doses. Of the 24 Chronic Hepatitis B Patients (CHB):

  • 21 had HBsAg >100 IU/ml at baseline

  • 17 have currently achieved HBsAg <100

  • 7 ≤10

  • 4 ≤1

  • In CHB with other viral parameters all patients have improved following ARO-HBV treatments in the following catagories: HBV DNA, HBV RNA, HBeAg, and HBcrAg.

ARO-HBV has been shown to be well tolerated by all in the trial. Results show that monthly RNAi with ARO-HBV effectively reduces all measurable viral products in patients, most notably HBsAg, making it a clear potential treatment for Chronic Hepatitis B.

ARO-AAT

Arrowhead is targeting Alpha-1 antitrypsin deficiency, a genetic disorder which causes liver disease in both children and adults. Alpha-1 antitrypsin (AAT) is a glycoprotein produced primarily in hepatocytes, wherein a PiZ mutation can cause improper folding of the protein and potentially leading to globules. An accumulation of globules can lead to a recurrent cycle of hepatic injury, fibrosis, cirrhosis, hepatocellular carcinoma, and more.

ARO-AAT is a hepatocyte targeted RNAi drug which functions to halt production of Z-AAT protein, in turn preventing liver globules. In the study, 45 healthy volunteers were given escalating single or multiple doses of ARO-AAT or placebo in a round of 4 placebo:4 active, where patients received a single 35 mg doses of ARO-AAT or placebo. Multi-dose patients were also in a round of 4 placebo:4 active and received three doses every 28 days at doses of 100, 200 or 300 mg. Meanwhile, the study enrolled 4 patients to each receive a single dose of ARO-AAT at 100, 200 and 300 mg to assess single dose duration of response.

Again, fortunately for Arrowhead, there were no reported deaths or severe adverse events associated with the study to date. Single dose serum AAT mean nadir reductions from baseline of:

  • 79% at 35 mg

  • 87% at 100 mg

  • >91% at 200 mg

  • >91% at 300mg 

According to the company, "Multi-dose mean nadir serum AAT reductions were >91% at all dose levels with most subjects BLQ. Maximum AAT reduction across all cohorts was >94%. A greater than 90% reduction was sustained for at least 8 weeks following the last dose in the lowest multi-dose cohort (100 mg), the only cohort with data of this duration." 

In the study, ARO-AAT has been well tolerated at the highest multi-dose level and has indicated high inhibition of hepatic AAT synthesis, drastically reducing the genesis of liver globules. 

Financials

Without taking into consideration the $175M that the company is receiving, nor any potential equity purchases or money generated from the JNJ deal, the company has reported having cash or cash equivalents on hand of $78.1M as of June 30, 2018.  The company at the time only had enough on hand to fund operations for the next 12 months.  While this had previously caused concern for additional financing before, the JNJ deal essentially triples the company's available cash on hand and can support operations for greater than likely two years, preventing the need to do an public offering any time soon.  The company currently stands on solid financial ground with plenty of cash on hand as well as potential funding for additional research, potential milestone payments, and potential future royalties from commercial sales.

Market

According to GBI Research, approximately 350 million people worldwide are infected with chronic hepatitis B, leading to 780,000 patient deaths each year. 

Globally, the hepatitis B therapeutics market is served predominately by Baraclude and Viread, both of which have received black-box warnings from the US Food and Drug Administration (FDA).  This label leads the hepatitis b treatment to be considered being a market with a large unmet need.  The global market is expected to grow at a CAGR of 2.3% from the current $2.9 billion to $3.5 billion. 

Due to being very well tolerated and clinically successful thus far, the potential of ARO-HBV being FDA approved without a black-box warning seems likely.

Review

I believe that Arrowhead Pharmaceuticals is a great buying opportunity at these current levels.  Investors reacted oddly in my opinion to the great news of the company receiving $175M in payments and potential for massive amounts of revenues exceeding $3.5B.  This prevents any short term financing or dilution that the company would have otherwise needed in order to operate moving forward.  The safety, tolerability, and effectiveness of the products being presented in the upcoming AASLD shows that JNJ was not mistaken in investing in this company.  Although Arrowhead could have likely garnered higher revenues and income in the long term if they had kept global licensing rights, the potential royalties as well as potential future funding of research is a great opportunity for this company to be able to focus financing on developing the other 6 products that it has in its pipeline.  I don't see a full logical reason for this stock to be trading at these lower valuations, I fully believe this is a steal under $15.

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