ALNY - Arrowhead Pharmaceuticals: Balance Sheet Concern Needs To Be Addressed

2023-12-01 09:00:08 ET

Summary

• Shares of Arrowhead Pharmaceuticals dropped this week after the company reported fiscal Q3 2023 results.
• Balance sheet concerns are weighing on the stock, and this is an urgent issue the company needs to address, and it has several options at its disposal.
• The preclinical toxicology results for ARO-RAGE and ARO-MMP7 were positive with sufficient safety margins to proceed into phase 2 development.
• 2024 should be a data-rich year with data from several ongoing trials early and mid-stage trials and from the phase 3 trial of plozasiran in FCS patients.

Arrowhead Pharmaceuticals, Inc. ( ARWR ) reported fiscal Q4 2023 results and provided a pipeline update this week. It was a generally upbeat update, with the company reporting positive preclinical toxicology results for ARO-RAGE and ARO-MMP7 with sufficient margins to allow the start of phase 2 trials in patients. However, that did not stop the stock from losing a quarter of its value.

Arrowhead Fiscal Q4 2023 results

The issue that needs to be addressed is the balance sheet . Arrowhead ended fiscal 2023 with $403 million in cash and equivalents and management guided for quarterly operating cash burn in the $110-130 million range in fiscal 2024 and another $150 million in capital expenditure as it nears the completion of the manufacturing site. That's around $600 million in cash required for fiscal 2024, and while there should also be some milestone payments from partners during the year, this means the company needs to raise a serious amount of cash to address ongoing balance sheet concerns.

On the earnings call , management did talk about this issue and the plans to address it in the near term. They say they have several good options to bring in the capital in "shareholder-friendly ways," including specific product financing for the plozasiran's (ARO-APOC3) phase 3 trial in severe hypertriglyceridemia ('SHTG') or for plozasiran's or zodasiran's (ARO-ANG3) cardiovascular outcomes trial, in return for limited royalties on those products. This would be a nice way to finance these trials, especially considering the fact royalties will be capped, unlike the olpasiran royalty monetization where Arrowhead lost all the upside from its success except the potential milestone payments from Royalty Pharma (RPRX) and Amgen (AMGN).

I am not concerned about the balance sheet because there are plenty of financing options, from royalty-backed financing to additional partnerships, and the company should not fear to use some equity along the way. It is actually quite an accomplishment that Arrowhead has not used equity to raise cash since Q4 2019. I calculated that it raised $910 million since then and most of it came from existing and new partners and $250 million from the royalty monetization agreement for olpasiran.

While I am not concerned, I do understand that, until this is resolved, the upside for the stock could be limited, especially if there are no important clinical data updates.

Trial updates

The company also said that Amgen has discontinued the development of a candidate that Arrowhead called ARO-XDH for the treatment of gout. The company has not seen the data, but I expected this candidate to go nowhere given Alnylam's ( ALNY ) discontinuation of a candidate also targeting XDH due to lack of a desirable treatment effect in gout patients and this update is as expected.

With these concerns and bad news out of the way, let us look at the other updates.

As mentioned, the preclinical GLP toxicology results for ARO-RAGE and ARO-MMP7 became available from both rodent and monkey trials. They were described as "highly encouraging" and with sufficient safety margins to proceed confidently to phase 2 trials:

• For ARO-RAGE, the No Observed Adverse Effect Level, or NOAEL, in the six-month rat study was the mid-dose and in the nine-month monkey study, it was the highest dose studied.
• For ARO-MMP7, the rat NOAEL was the highest dose and for the monkey, it was the mid-dose.

As a reminder, the preclinical toxicology findings killed the first-generation ARO-ENaC candidate as the doses were too high and caused local lung inflammation in preclinical tox studies.

The current pulmonary clinical candidates are far more potent and require lower doses and less frequent administration. I should also mention that the doses tested in rats and monkeys are several times higher than the doses that are being tested in humans.

The company also said that 145 healthy volunteers and patients have been tested to date in clinical trials, with no adverse findings that are specific to the above-mentioned issues that are specific to the way this drug is administered to the lung.

Management also said a subcutaneous version of ARO-RAGE is being tested in clinical trials due to the promising preclinical results (see presentation slide below) and it could provide another way to administer ARO-RAGE and/or other candidates where inhalation may not be suitable. Subcutaneous administration could also widen the therapeutic window of these drugs and address any remaining concerns that are tied to the inhalation route.

The ARO-MUC5AC phase 1/2 trial is progressing slower than expected, as the company is finding it more challenging to enroll patients due to some protocol requirements for severe asthma patients, but management said we could see some data in mid-2024. The preclinical toxicology data for this candidate are not expected anytime soon because the company wants to be better informed about the potential dosing schedule in humans before it starts the preclinical toxicology trials.

Going back to ARO-RAGE, we should see plenty of data in asthma patients next year. The less important RAGE knockdown data in asthma patients in higher dose cohorts are expected by Q2 2024, and the more important data in high FeNO (fractional exhaled nitric oxide) patients are expected by Q3 2023. Elevated FeNO levels indicate airway inflammation and this cohort was added to enrich for an anti-inflammatory signal that could provide initial proof-of-concept for the RAGE target and what it can actually do in asthma patients.

With a very potent knockdown that should be in the 80% to 90%+ range, there should be no doubt that ARO-RAGE does significantly reduce the expression of RAGE in healthy volunteers and asthma patients. The question is whether this significant knockdown provides a clinical benefit.

The good thing about measuring FeNO is that we can compare ARO-RAGE data to the effect of biological asthma drugs like dupilumab (Dupixent) and tezepelumab (Tezspire). Dupilumab and tezepelumab have demonstrated 47% and 42% FeNO reductions, respectively, and provide a benchmark for ARO-RAGE. The company believes that approximately 25 patients in the trial should be sufficient to adequately assess the effect of ARO-RAGE on asthma patients with high FeNO at baseline.

With preclinical toxicology data out of the way, these ARO-RAGE updates, along with the potential preliminary data of ARO-MUC5AC in asthma patients are the most important events for the pulmonary platform in 2024.

Moving on to plozasiran and zodasiran. The phase 3 trial of plozasiran in familial chylomicronemia syndrome ("FCS") patients is expected to be completed in Q2 2024 with topline results shortly thereafter. This is a very small orphan market for plozasiran and the data from phase 1 and 2 trials of plozasiran indicate a high probability of success as it achieved substantial reductions in triglycerides.

The phase 3 trials of plozasiran in SHTG patients are expected to start soon, but these trials will take time to enroll and the primary endpoint is after one year of treatment.

Arrowhead is going back and forth on which of the two candidates to move into a cardiovascular outcomes trial, or CVOT. Plozasiran was previously expected to proceed to a CVOT and now, zodasiran is also being considered again. A decision is expected in the coming months. Ideally, Arrowhead should push both candidates into CVOT trials, but that is not going to happen while both are wholly owned. A big pharma partner for one or the other would be needed to have both candidates in CVOT trials.

I was favoring zodasiran in terms of cardiovascular benefit since seeing the initial data from both candidates, and I am happy it is back in contention. Plozasiran could have a large market even if the company does not do a cardiovascular outcomes trial - severe hypertriglyceridemia affects millions of patients and if it achieves a significant reduction in the risk of acute pancreatitis which should add a significant treatment benefit beyond triglyceride lowering, it could be a significant drug in this market alone.

Homozygous familial hypercholesteremia ("HoFH") is a small market to go after for zodasiran, similar to what FCS is for plozasiran, but there is no large secondary market for zodasiran in the absence of a CVOT. So, a CVOT would be the natural next step as the candidate is a potent TG-lowering agent as well, in addition to reducing LDL cholesterol, remnant cholesterol, non-HDL cholesterol, and ApoB.

Both agents seem very safe and well tolerated. Worsening glycemic control is something to look out for, but it appears in some patients with poorly controlled type 2 diabetes, and the issue seems manageable with adjustments to diabetes medications.

Other tissues are also becoming increasingly important. The initial results from the phase 1/2 trial of ARO-SOD1 in patients with SOD1 ALS are expected in the second half of 2024. The indication by itself is not of high value due to the very low incidence of SOD1 ALS, but it will provide important validation for the CNS platform.

Earlier this week, Arrowhead filed for regulatory clearance to start a phase 1/2 trial of ARO-DM1, the second skeletal muscle-directed candidate for the treatment of type 1 myotonic dystrophy. This brought the number of clinical stage candidates up to 15 with 10 being wholly owned and the other 5 partnered. There is no company guidance on data readouts from either this trial or the trial of ARO-DUX4 in FSHD patients, and I assume we will have to wait until 2025 to see the preliminary data for the skeletal muscle platform.

Speaking of ARO-DUX4, CEO Anzalone said that this candidate will not be partnered, at least not in the near term as the negotiations with potential partners fell through.

Conclusion

Arrowhead's pipeline is moving forward and expanding, but the slim balance sheet and the lack of meaningful data readouts along with poor biotech sentiment are potential reasons the stock is not doing that great lately. The balance sheet issue will be addressed in the following months, one way or another, and the pipeline is in the rapid expansion phase and should start producing meaningful clinical data in the following quarters. Biotech sentiment is outside of the company's control, so, it could remain a drag on Arrowhead if it does not improve in the near term.

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