ARCT - From Financial Metrics To mRNA Milestones: Arcturus Therapeutics' Evolving Journey

2023-11-17 03:01:07 ET

Summary

• Arcturus Therapeutics is a biotech firm focused on mRNA vaccine development and delivery technologies.
• The company's core investment thesis is centered around its cutting-edge research and its ability to derive revenue from its collaborations.
• The potential approval of its first vaccine will work as a proof-of-concept for its mRNA platform and will likely raise the market expectations.

In this analysis, we delve into Arcturus Therapeutics (ARCT), a biotechnology firm at the forefront of mRNA vaccine development and delivery technologies. For a comprehensive background, refer to my previous analyses linked here and here . The core investment thesis for Arcturus is anchored in its cutting-edge research, notably in developing treatments for conditions such as Ornithine Transcarbamylase deficiency and cystic fibrosis, and its pioneering work in self-amplifying mRNA vaccine technology, which has yielded encouraging preclinical outcomes.

From a financial standpoint, Arcturus has strategically navigated its path to extend its fiscal sustainability, emphasizing partnerships that mitigate financial risks through profit-sharing and royalty models. A notable collaboration with CSL is centered on crafting mRNA vaccines, highlighted by a $200 million payment and potential for further milestone-based revenues.

Additionally, the alliance with Meiji Seika Pharma is crucial, focusing on the development of ARCT-154, a novel self-amplifying mRNA COVID-19 booster vaccine, with Meiji bearing the development costs in Japan. Outside these collaborations, Arcturus is propelling its pipeline forward with projects like ARCT-810 for OTC deficiency.

Reflecting on my previous assessments, I maintained a bullish stance on Arcturus's stock. Notably, the stock experienced a significant price breakout earlier in the year, though it retracted those gains since September, a movement I attribute more to broader market dynamics rather than company-specific factors. In light of these developments, the time seems ripe for a fresh evaluation of the company's prospects.

ARCT-154

The New Drug Application ((NDA)) for ARCT-154, a vaccine targeting COVID-19, is under review by Japan's Pharmaceuticals and Medical Devices Agency ((PMDA)). This submission, spearheaded by Meiji Seika Pharma and CSL Seqirus, positions ARCT-154 as both a primary and booster vaccine option.

Phase 3 Booster Study outcomes are promising, showing ARCT-154's immune response to the original SARS-CoV-2 strain on par with Pfizer-BioNTech's Comirnaty, and even superior in neutralizing the Omicron BA.4/5 variant. A standout feature of ARCT-154 is its usage of the STARR next-generation mRNA technology, administered at a significantly lower dose (5 micrograms), hinting at potential safety and tolerability advantages.

The European market is also in sights, with a marketing authorization application filed.

ARCT-810 Development for OTC Deficiency

ARCT-810, an mRNA therapeutic for Ornithine Transcarbamylase ((OTC)) deficiency, aims to replace the deficient OTC enzyme and improve patients' quality of life. The FDA has granted it Orphan Drug and Rare Pediatric Disease Designations.

Clinical study fronts include a completed Phase 1b study in the U.S. and an ongoing multi-dose Phase 2 study in the UK and Europe, targeting enrollment of up to 24 adolescents and adults.

ARCT-032 Development

Arcturus is also making strides with ARCT-032, an inhaled mRNA therapeutic candidate for cystic fibrosis. Leveraging the LUNAR delivery technology, a completed Phase 1 study in New Zealand involved 32 healthy subjects, with safety and tolerability results anticipated in early 2024.

The CF Foundation has upped its investment to $25 million, reflecting confidence in ARCT-032's potential. October 2023 saw ARCT-032 receiving Rare Pediatric Disease Designation from the FDA, which could lead to a priority review voucher for another product upon approval.

Notably, new data presented at the NACFC showcased ARCT-032's efficacy in a CF Ferret model, indicating successful transfection and improved mucociliary clearance, outperforming the CFTR modulator Kalydeco.

Financial Results Breakdown

Arcturus's revenue trajectory is on an upward curve, with reported revenues hitting $45.1 million, a significant jump from $13.4 million in the same period last year. The substantial revenue increase primarily stems from license fees, consulting and technology transfer fees, and collaborative payments. The collaboration with CSL Seqirus and grant revenue from BARDA are pivotal contributors to this revenue uptick.

The net loss has narrowed to approximately $16.2 million, or $0.61 per diluted share, an improvement from a larger loss of $35.3 million, or $1.33 per diluted share, in the previous year. The company's liquidity position remains robust, with cash and equivalents totaling $369.1 million as of September 30, 2023.

The operating expenses also saw an increase, reaching $64.5 million compared to $50.2 million in 2022. In terms of expense allocation, Research and Development (R&D) expenses account for the lion's share of costs at $51.1 million, reflecting the company's deep investment in clinical research, manufacturing, and personnel. General and Administrative (G&A) expenses also rose to $13.4 million, driven by factors like an expanding workforce, increased travel and consulting activities, and higher rent obligations.

A key highlight from the 3Q23 earnings call was the achievement of a $35 million milestone from CSL, earmarked for the LUNAR COVID-19 vaccine program's development. While, on the ground, Meiji Seika Pharma, in collaboration with CSL Seqirus, is spearheading the charge for ARCT-154 in Japan, covering the spectrum from regulatory approval to marketing and distribution. On the manufacturing side, further bolstering Arcturus's capabilities is ARCALIS, a major player in mRNA drug manufacturing. With a $165 million investment from the Japanese government, ARCALIS has completed a state-of-the-art mRNA drug substance manufacturing facility.

Valuation and Risks

In dissecting Arcturus Therapeutics' financials, a noteworthy evolution is evident in its liquidity metrics, particularly the current ratio. This ratio has ascended from 3.19 in the fourth quarter of 2022 to a more robust 4.5 in the third quarter of 2023. This uptick is largely fueled by the influx of funds from the company's strategic collaborations, a testament to its effective partnership strategy.

However, delving deeper into the revenue composition of 2022, a standout year for Arcturus, we encounter a caveat: a significant chunk of this revenue is characterized as non-recurring. This aspect introduces a layer of unpredictability regarding the company's financial runway and raises questions about the potential for a resurgence in cash burn rates in the forthcoming periods.

Despite this, Arcturus has demonstrated a consistent competency in generating liquidity through its myriad collaborative ventures. This ability to mobilize cash inflows from such partnerships has been pivotal in maintaining a stable financial course so far.

Our emphasis on revenue generation for companies like Arcturus, which predominantly don't derive revenue from product sales, becomes particularly salient in the current financial climate marked by high interest rates and market volatility. The ability to consistently generate cash is more than a financial metric; it's a lifeline. These companies, in the absence of robust cash generation mechanisms, find themselves vulnerable to the whims of capital markets. In a scenario where market liquidity might tighten, the risk of these financial avenues becoming less accessible looms large.

Arcturus's prowess in forging revenue-generating collaborations, thereby extending its financial runway through the end of 2026, is not just commendable but essential for navigating potential economic downturns. This capability suggests a resilience that could help the company weather economic uncertainties.

On the other hand, the development of ARCT-154 does more than just reinforce the viability of Arcturus' mRNA vaccine platform; it underscores the expansive potential of their broader mRNA vaccine and therapeutic programs. This aspect excites me about the company's future.

In assessing the company's valuation, I maintain both bullish and bearish scenarios. The bullish scenario posits a company valuation of $67.6, while the bearish scenario suggests $10.8, as detailed in my prior analysis .

Looking forward, I anticipate that by 2025, the market will likely acknowledge the probability of at least one of Arcturus's programs achieving commercial success. This recognition might lead the market to assign a 50% weight to the bullish scenario, culminating in a projected stock price target of $39.19. This valuation aligns closely with market trends observed thus far, supported by the underlying dynamics discussed in this analysis.

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