ARWR - Arrowhead: Biotech Innovation On Display

2023-06-06 11:55:31 ET

Summary

• Arrowhead is a promising biotech company with a strong platform and pipeline of drugs targeting various diseases.
• Arrowhead has expanded its focus from liver disease to cardiovascular, pulmonary and central nervous system diseases, with multiple exciting drugs in clinical development and FDA trial phases.
• The Arrowhead team is a driven, experienced and talented group.
• Building an investing stake in the company is likely to yield positive results for the biotech/pharma slice of a portfolio.

Introduction

Arrowhead Pharma (ARWR) is an extremely promising and growing biotech company that presents a great opportunity for investors.

Arrowhead's platform - TRiM ^TM - is based on targeting diseases by "silencing" the genes that cause them. It uses RNA chemistries and efficient delivery systems to attack disease-causing genes, knocking them down via RNA interference .

Arrowhead has shown the value, reliability and effectiveness of its platform, which serves a pipeline stocked with a range of drugs in clinical and FDA trial phases:

The original focus on liver disease has expanded to multiple disease targets including in liver, cardiovascular, pulmonary and central nervous system - CNS - spaces. Certain Arrowhead investigative drugs targeting cardiovascular diseases are in Phase 2 or 3 stages. Phase 3 precedes required FDA approval before a drug can be commercially and legally marketed.

The company's creation of a range of drug candidates across several target disease classes suggests coming major commercial success with corollary investor benefits. Investors should take that as a sign of both the power of its platform and the strength of its leadership team in methodology and practice.

While Arrowhead originally maintained full control and responsibility for financing all its investigative drugs, it has moved toward a hybrid development/drug ownership model.

Partner or license agreements with companies such as Amgen, JNJ (Janssen) and Takeda shift clinical development for affected drugs to a different context - one with additional resources and recognition from approval authorities. Meanwhile, the partner milestone payments create a major source of funding for ARWR operations and contribute to its balance sheet.

Arrowhead Operational Model

CEO Christopher Anzalone, introducing the recent ARWR Analyst Research & Development Day , kicked off the event this way: "We have a saying at Arrowhead that 'every day matters.'"

Dr. Anzalone emphasized a commitment to patient health and science both. He elaborated on the urgency aspect of Arrowhead's operations and the importance of moving quickly from idea to clinical setting with its drugs.

The CEO pointed out that TRiM has existed since 2017, but had no drug candidates in clinical studies. Six years have passed and Arrowhead has 16 drugs, 12 in clinical phases.

Arrowhead operates with an intelligent and practical methodology:

1. Selecting disease categories and specific diseases based on the presence of a misbehaving gene that can be targeted by RNAi/TRiM therapies;
2. Being realistic in choosing candidates, chasing those that are expected to succeed and leaving the rest;
3. Emphasizing a clinical success rate that exceeds that of competitors; and
4. Learning from past mistakes and experiences.

The overall impression is that of high-level science and a realistic, hybrid development and financing model.

CNS and ARO-SOD1: ARWR Methodology in Disease Targeting

Arrowhead has made the most progress in experimental drug development in the liver and cardiovascular spaces. However, it's branching out strategically into some very difficult disease areas. One is Central Nervous System ((CNS)) disease, a "rich" target full of crippling and tragic forms of disease.

The first CNS target disease for ARWR is ALS (Amyotrophic lateral sclerosis) , a rare neurological disease that affects motor neurons-those nerve cells in the brain and spinal cord that control voluntary muscle movement. ALS is more widely known at Lou Gehrig's Disease, for it's the malady that afflicted the famous New York Yankees' ballplayer of the 1920s and 1930s.

At the R & D day presentation, Arrowhead's SOD1 presenter Dr. Christine Esau spoke about the malevolent effects of CNS disease:

"There are more than 50 million people worldwide living with neurodegenerative diseases. It's the leading cause of disability and there's almost no therapy available."

This graphic suggests the scope and scale of CNS diseases:

Dr. Esau spoke about the role of biomarkers in how TRiM attacks CNS disease. They're based on lipid-conjugate design , which allows for novel delivery systems combining proteins and lipids. Such conjugates have synergistic treatment benefits.

Some ALS patients suffer from SOD1 ALS (2% of all ALS patients). A "misfolded" protein proliferates as a result of a defective gene's presence. The protein controlled by the gene proliferates in a dysfunctional manner.

This disease process fits the RNAi and TRiM models, so SOD1 ALS sufferers were a logical patient pool for a new Arrowhead drug, ARO-SOD1 . Since the target group is relatively small among ALS victims, fewer patients need be involved in testing for the drug to advance through trial phases. This may help speed the trial phases and lead to significant revenues for the effort involved.

The science behind ARO-SOD1 relies on biomarkers in people suffering from the disease. A biomarker is "a biological molecule found in blood, other body fluids, or tissues that is a sign of a normal or abnormal process, or of a condition or disease. A biomarker may be used to see how well the body responds to a treatment for a disease or condition."

Biomarkers can be predictive or response biomarkers. There also are prognostic markers, giving telling indications about survival rates or rates of functional decline in patients.

In ALS, neurofilament light levels (NFLs) function as biomarkers - elevated NFL correlates to the development of ALS. Neurofilaments are actually components of neurons. For SOD1 ALS patients, the increase of NFL levels to a threshold marks the onset of disease.

Dr. Esau provided specific promising results form ARO-SOD1 preclinical trials with rats and primates. In primates there were effective mRNA reductions of 85%-90%. Even with sharp dose reductions, the knockdown effects persisted.

Dr. Esau wrapped her presentation by pointing out that ARWR intends to look beyond ALS and move on to additional CNS diseases. ARO-SOD1 may serve as a template to treat additional CNS neurodegenerative diseases.

CNS diseases (including ALS) may be the toughest class of diseases to attack clinically. This reflects the ambitiousness of Arrowhead's programs and its faith in its drugs to treat this disease class.

ARWR Pulmonary: The Example of ARO-RAGE

Additional ARWR scientist presentations at R & D day included one by Dr. Erik Bush on the evolution of TRiM in relation to pulmonary disease . This slide includes the essence of his comments:

Arrowhead's expansion into the pulmonary disease class includes ARO-RAGE, referred to in the slide.

Dr. Bush describes how the ligand receptors (sugar-modified proteins) associated with lung disease "prefer" these drugs in trial to other cell types. The inflammation-causing receptors absorb the drug while non-targeted cell types essentially ignore them.

Current small-molecule-based treatments are not very effective in treating lung disease. ARO-RAGE looks to change that equation. It's currently in an early phase, but indicates enormous promise in treating lung disease.

The ARWR Bull Argument

I believe there's a strong bull case for Arrowhead that rests on multiple pillars:

• A very strong and proprietary platform that's now proving itself. The platform is based on very specific science, using RNAi methodology as a basis. The pipeline that is the expression of the platform is healthy and features 16 different drugs in development - 12 of those in clinical stage.
• Progression of disease candidates through FDA trial phases . This is where the rubber meets the road. ARWR drugs in development are meeting trial standards and progressing towards approval.
• Expansion into different disease classes. Proving the validity of the platform and its scientific basis in liver disease was certainly a promising start. Widening the reach into areas such as cardiovascular and pulmonary, and now into CNS and additional areas, is validation of the platform's worth and practicality.
• Sound business management exemplified in partner/license deals that provide non-dilutive funding . The ability to attract multiple powerful partners that are major players in the pharma space and to receive successive, impactful milestone payments based on drug trial phase progression is telling. The eagerness of such partners to join forces with ARWR is vindication of its scientific excellence.
• Leadership and staff quality . A company is as good as its employees. Arrowhead platform, pipeline, trial progress and partnerships are all evidence of that quality.

Metrics

I include a number of Arrowhead metrics. First is share price history over the past five years:

For an investor that put money into ARWR in 2018 and held, the returns are just fine. For those without enough discipline or belief, it was very possible to invest at peaks and see several precipitous declines. This speaks more to investor psychology than to ARWR share price performance.

Such volatility should be expected for companies developing quickly, spending to ramp up, and before bringing drugs to market.

Next is a revenue chart, again for the past five years =and also including a projection for 2024:

The following chart illustrates EPS and revenue both on a year-on-year and on a quarterly basis:

Most recent quarterly results in both measurements are positive, while Q3 are less so. Still, year over year for revenue is an extremely good luck, while the EPS losses (again, not surprising for a small biotech) are projected to shrink in a 2023 versus 2022 comparison.

Some of the financial strength indicators are quite mixed according to GuruFocus:

The overall picture is that of positives and negatives in battle. I think the positives outweigh the negative contributions, but those must be considered.

Risks

Risks definitely exist for those considering investing in Arrowhead or currently invested.

• Despite the solid platform and the thriving pipeline derived from it, ARWR has yet to drive a drug through to approval. That includes its wholly-owned drugs and those partnered or licensed with larger companies. Until the first drug is approved, some concern will remain that a flaw in the methodology might exist. I see this as a minor risk, reflected more in investor impatience for the first approval.
• Competitors might effectively block ARWR from a major success story. Many competitors are working to solve some of the dread diseases I have discussed. ARWR needs a few drugs to be approved and to be winners in their categories - being one of several is probably not enough to drive the big revenues or bring a surge of investors onboard. If Arrowhead science is as good as it seems, the risk here is low.
• Specific partnered drugs might not make it through to approval, or perhaps falter a few stages earlier - in which case important milestone payments might dry up and ARWR might be less attractive to future partners. Minor risk.
• Leadership may change. Chris Anzalone and his senior team have demonstrable track records. Dr. Anzalone seems a committed, strategic leader. While his departure or that of multiple senior scientists would be losses, this looks unlikely at present.

Summary

I see ARWR as a very strong, innovative and strategically-focused biotech. It has a strong leadership, fine scientists, a proven platform and a growing, diverse pipeline.

Arrowhead is a practical company with a diverse research and business approach and a hybrid development model split between wholly-owned and partnered-licensed drugs. It has weathered some storms, a reality that reflects both the intrinsic strengths of its science and a resolute leadership.

As a young biotech swimming in a sea of powerful pharma "sharks," Arrowhead is still vulnerable. It has yet to see FDA approval for a Phase 3 trial. Nonetheless, it has a raft of innovative drugs in several disease classes. While it remains strongest or most advanced in liver and cardiovascular area, ARWR is confidentially moving into difficult disease classes. I have highlighted two here - CNS and pulmonary.

The potential for success in all these areas is enormous. The share price has certainly seen peaks and troughs. Continued volatility is likely.

Arrowhead's promise is nothing short of spectacular. For true, long-term investors, I believe that ARWR is a buy. Until that first approval comes through, the share price may not surge. When it does, I expect it to at least double.

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