ARWR - Arrowhead Pharmaceuticals: Transition To Commercialization

2023-12-07 12:26:16 ET

Summary

• Arrowhead Pharmaceuticals is transitioning from a pre-commercialization phase to a fully commercial pharmaceutical company.
• The company is focused on bringing candidate drugs in varied disease categories to regulatory approval.
• Arrowhead is increasing focus on its pulmonary offerings and has shown promising results in its pulmonary drug candidates. This complements its strong cardiovascular and liver category offerings.
• I believe the company is a solid buy for long-term investors looking to hold a high-quality biotech within a diversified portfolio.

Introduction

Arrowhead Pharmaceuticals (ARWR) is a company in stages of transition that are both conceptual, strategic and practical. It has been a long-term biotech startup whose business model is built on an innovative technological platform.

For all the promise - recognized by analysts, investors and established pharma partners - Arrowhead has been stuck in a pre-commercialization research and development phase. While its TRiM ^tm platform has shown every sign of scientific solidity and promise, the investigative drugs based on its technology have yet to receive FDA approval.

Ironically, as ARWR has developed more drugs in more disease segments, the costs of development and the market’s impatience have seen its share price perform in ways to disappoint bulls and discourage new investors.

An Evolving Strategy

Arrowhead, under the leadership of Dr. Chris Anzalone, has recognized the need to redefine the company. It's also implementing a strategy to bring about the maturation into a fully commercial pharmaceutical.

The path to commercialization includes vigorously pursuing new drugs in relatively new disease categories. The drive to bring drugs in development to regulatory approval is geared to starting a revenue stream that's organic and lessens the dependence on partnerships. At the same time, ARWR sees research on its investigative drugs in promising spaces such as pulmonary as attracting both new partnerships and investments.

Arrowhead has pursued a hybrid strategy of promoting both wholly-owned drug franchises and partnered/licensed drugs. This still pertains. The difference today is that it's driving hard along both paths.

Such a leap also will attract new shareholders and reassure existing ones. It has increasing expenditures while registering an increase in net losses for 2023 vs. 2022. Very promising candidates such as the pulmonary investigative drugs also require funding as too the building out of ARWR lab/production facilities as in Wisconsin.

ARWR risks being perceived as stuck in the development phase. The modified strategy, with its commercialization focus, reflects awareness of this reality.

Broadening the Pipeline

Broadening the in-house, wholly-owned pipeline is an important focus given that two of the FDA Phase 3 drugs (liver drug Fazirsiran) and cardiovascular candidate Olpasiran are partnered (Fazirsiran with Japan’s Takeda (TAK)) or licensed - (Olpasiran with Amgen (AMGN)). ARWR has every reason to believe and want those two drugs to achieve commercial approval, but to justify its hybrid strategy and commitment to internal RND, it also wants to see its own candidates drive to the finish line.

In the group of advanced, wholly-owned drugs, the cardiovascular category drug ARO-APOC3 (now Plozasiran ), which targets hypertriglyceridemia, is the farthest along the FDA phase process. Plozasiran is in Phase 3 testing as well.

The specific program or headline for pipeline expansion is "20 in 25," which translates into 20 clinical or marketed products by 2025. At present, ARWR has 15 clinical programs - 10 wholly owned and five in development with partners.

ARWR has developmental drugs in at least six treatment spaces, but its current focus is on its pulmonary offerings. CEO Anzalone made this clear in his presentation during the earnings call on Nov. 29.

The Pulmonary Push

Pulmonary has moved into important focus among the various disease spaces. While the cardiovascular and liver drugs are ahead of pulmonary from a trial phase perspective, the lung segment is a clear priority for ARWR.

ARWR’s first serious entry into pulmonary was centered around ARO-ENaC. This first-generation candidate ran into serious issues with effects of inflammation in rat and monkey subjects and related toxicology issues. Good Laboratory Practices required a full stop in ARO-ENaC testing to create a next-generation candidate with improved potency and enhanced duration of effect. These changes would stretch the dosing interval while reducing exposure in the subjects.

Correspondingly, ARWR has now received chronic toxicology results in rodent and primate species for its ARO-RAGE* and ARO-MMP7* candidates. The primary conclusion is that the NOAELs (No Observed Adverse Effect Levels) imply sufficient safety margins towards a smooth transition into Phase 2 studies.

* ARO-RAGE is designed to reduce production of the Receptor for Advanced Glycation End products (RAGE) as a potential treatment for various muco-obstructive and inflammatory pulmonary diseases.

* ARO-MMP7 is designed to the reduce expression of matrix metalloproteinase 7 (MMP7) as a potential treatment for idiopathic pulmonary fibrosis.

The second marker or indicator for progress after toxicology results is proof of clinical safety and evidence of drug efficacy. Three pulmonary programs now in human study stage have shown no worrying safety signals in trials with 145 subjects.

The final marker, which Dr. Anzalone describes, is to demonstrate practical success as useful treatments for diseases targeted:

“…we need to ensure that our pulmonary drug candidates are doing what they are intended to do…ARO-RAGE data have been very encouraging. Normal healthy volunteers showed 89% mean max knockdown and 95% max knockdown of circulating sRAGE after 2 doses of 184mg ARO-RAGE. At 92mg, healthy volunteers showed a mean max knockdown of 80% and max knockdown of 90% after 2 doses…these data…serve to de-risk the entire pulmonary franchise.”

The signs are positive and indicate that Phase 2 studies are actionable for both pulmonary drugs. In the case of ARO-RAGE, ARWR has focused on mild asthma patients as a treatment group. It's also relying on biomarkers to determine whether the drug is engaging inflammatory pathways.

Cardiovascular and Liver Stalwarts

The pulmonary entrants join the existing Phase 3 entrants, the two cardiovascular candidates and the liver drug:

• Plozasiran (ARO-APOC3) - ARWR-owned
• Olpasiran* (Licensed to Amgen)
• Fazirsiran (partnered with Takeda)

If we accept ARWR’s optimism on its pulmonary candidates, as I do, then the company has clearly staked out territory in three important disease categories (cardiovascular, liver and pulmonary).

Arrowhead is not focused on Olpasiran, in part because it's fully licensed to Amgen. Arrowhead has limited visibility into Amgen’s processes.

Note: Arrowhead has early and pre-phase offerings in additional spaces. This graphics provides visual evidence of the variety of its candidates:

Commercialization

As mentioned in the Introduction, Arrowhead is cognizant of the need to move to the commercialization track:

“The path to commercialization includes vigorously pursuing new drugs in relatively new disease categories. The drive to bring drugs in development to regulatory approval is geared to starting a revenue stream that is organic and lessens the dependence on partnerships.”

Raising Capital

As Dr. Anzalone also mentioned in the conference call , raising capital is a key aspect of the commercialization transition strategy.

“We are actively working on opportunities to bring in capital in shareholder friendly ways… for instance, we are exploring specific product financing for the plozasiran sHTG P3 study and separately a possible CVOT (cardiovascular outcome trial), whether done with plozasiran or zodasiran. We believe we could source sufficient capital for those studies in return for limited royalties on those products.

“In addition, we have discussed business development in the past. We now have five different platforms that incorporate the design of high-quality RNAi molecules that target 5 different cell types: Hepatocytes , skeletal muscle, pulmonary, adipose, and CNS…we believe there is ample room to work with partners and also continue to build an extensive wholly-owned pipeline.?

Raising capital can play out in different ways: 1) To finance specific Phase 3 studies, and 2) to preface a royalty arrangement with the sources of that capital once the drugs are approved.

ARWR also is expecting that the generalized expansion of the pipeline within the "20 for '25" strategy will attract more capital sources. Arrowhead clearly intends and needs to implement this renewed strategic expansion - also to reassure current shareholders and attract future ones.

The Financial Picture

Arrowhead CFO Ken Myszkowski provided a clear view into the company’s overall financial picture at the end of Q3 2023:

“As we reported today, our net loss for fiscal 2023 was $205.3 million or $1.92 per share based on 106.8 million fully-diluted weighted average shares outstanding. This compares with net loss of $176.1 million or $1.67 per share based on 105.4 million fully-diluted weighted average shares outstanding, for 2022. Revenue for fiscal 2023 was $240.7 million, compared to $243.2 million for 2022. Revenue in the current period primarily relates to our collaboration agreements with Takeda, GSK (GSK) and Amgen. Revenue is recognized as we complete our performance obligations or key developmental milestones are reached.?

Net losses increased significantly compared to 2022 while share count barely increased. Revenue was essentially flat when comparing 2023 to 2022 results.

Note that revenue is a function of partner/collaboration agreements - including licensing - with the three large pharmas Takeda, GSK and Amgen.

If we consider Myszkowski’s statement in the context of CEO Anzalone’s commercialization strategy, it's clear why the latter emphasizes bringing Phase 3 drugs to market. This will greatly enhance sources of revenue whether from wholly-owned drugs or from royalties deriving from partnered/licensed drugs. (Currently, those bring in scheduled milestone payments only.)

Why ARWR is focused as well on building shareholder value and loyalty is clear from the five-year share price chart:

The next chart puts the 2022-2023 revenue discussion from the conference call in a broader perspective.

EPS projections reflect the reality of a biotech still financially in early stages. However, these numbers should improve both substantially and fairly quickly once further progress towards commercialization is achieved.

Risks

Investing in any biotech in a pre-commercial phase - even one perched on the edge of commercializations - carries risks. Any investment carries a reward-risk ratio.

To drill down into ARWR's specific strengths and weaknesses, its current status and future prospects requires consideration of these risks:

1. Capital expenditures VS. funding sources. Arrowhead is expanding within the strategic plan outlined in the Q3 conference call. The continuing building of its pipeline candidates while driving Phase 3 trials is both exciting and costly. Add in the costs of building and maintaining the ARWR facilities now underway. I consider this to be a significant risk, as money needs to be raised soon. ARWR has proven its ability to establish new partnerships as past funding sources, so it clearly understands how to promote candidates and engage in successful negotiations. These skills should apply as well to future funding efforts.
2. Possible failure of drug candidates now in trial phases. This pertains most directly to key candidates described in the article - particularly in the cardiovascular and pulmonary categories, but extending as well to liver (Takeda/Fazirsiran). ARWR is placing a good deal of weight on its own cardio offering, Plozasiran, as well as the two pulmonary drugs (ARO-RAGE and ARO-MMP7). Given the nature of drug testing phases and approval process, this is at least a moderate risk.
3. Leadership changes. This is a risk for any company. For a biotech that relies on tremendous in-house scientific assets and knowledge, such change can have major impact. If reviewing the tenures and commitment of ARWR's leadership group, this is a minor risk.

Summary

Arrowhead Pharmaceuticals is an amazing company with a very talented leadership and bedrock of scientific talent. It has advanced a long way since its beginnings, building an impressive pipeline of wholly-owned and collaborative drugs. ARWR has proven the power of its RNAi-based TRiM platform, both in wholly-owned candidates and via those partnered or licensed with large pharmaceuticals. This hybrid approach is practical and a renewable source of money to cover operations costs - including construction of physical research and production facilities.

The transition to commercialization is necessary for a company whose schedule of drug development and approval has lagged optimistic expectations. The path has been long and the faith of investors has been tried by share price performance over the last several years.

In my view, the underlying science remains unique and most impressive. The power of the evolving TRiM platform underpins the entire Bull story, which I believe remains intact and most promising.

Investors should be aware that ARWR is in transition toward commercialization. This may frighten people away; evidence of the science, the quality of staff and leadership reinforces my belief in ARWR as a worthwhile biotech/pharma holding within a diversified portfolio.

Good luck to all.

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