Why Arca Biopharma Is A Buy

| About: ARCA biopharma, (ABIO)

Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Blockbuster Potential

The AHA expects 8 million patients will suffer from heart failure (HF) by 2030; atrial fibrillation (AF) will prevail in 12.1 million patients by 2030. Arca Biopharma (NASDAQ:ABIO) is a pre-revenue company that has patents through 2029 covering the drug Gencaro (generic: bucindolol). Bucindolol could treat HFREF patients by preventing AF -- this suggests a potential addressable market peaking in excess of 2 million patients for Arca's flagship drug. Such a market equates to billions of dollars in potential revenue.

Beta Blockers and Atrial Fibrillation

Clinicians and regulators are both exceedingly comfortable with the utilization of beta blockers for cardiovascular indications. Drugs in this class enjoy relatively smooth paths through approvals and are popular with prescribers. Bucindolol is a beta blocker; it was tested a decade ago for treatment of advanced chronic HF -- unsuccessfully. However, a researcher in the HF trial inferred that bucindolol could be repurposed to prevent AF.

Indeed, a rigorously objective 2007 meta study concluded that beta blockers should be the first-line treatment for HF-related AF. This meta-study included data from seven studies totaling over 10,000 patients. The meta-study combed through randomized HF beta blocker studies and isolated those with follow-up data on AF. One of these studies covered metropopol, which is a widely prescribed beta blocker. Another one of these studies covered bucindolol. The meta-analysis showed similar results between the two drugs.

Personalized Medicine

Bucindolol is genetically "very favorable" to 50% of humans. Thus Arca may be in possession of the first genetically personalized cardiovascular drug. Phase IIB/III trials begin patient enrollment this quarter, and will compare bucindolol with metropolol.

Although the 2007 meta-study of beta blockers showed that bucindolol and metropolol are similarly effective in preventing AF, the 2007 study did not incorporate genetic personalization. Subsequent research has demonstrated that "very favorable" bucindolol-genotypic patient populations show almost double the reduction in AF onset compared to the other 50% of patients.

Reading Between the Lines

The global AF market will soon exceed $10 billion annually, with the majority of share going to pharmacological solutions. From market introduction to patent expiration, Gencaro will target the needs of an average of 1.5 million patients. Gencaro will be marketed as a first-line prescription for prevention of AF. Based on these parameters and assuming a healthy penetration rate, Gencaro's IP-monopoly could be worth $15 billion in net present value. Even if that is discounted by 90% for regulatory and distributive uncertainty, Arco Biopharma is worth $1.5 billion, which represents 50x upside on the current market capitalization of approximately $30 million.

Hype of potential blockbuster drugs superabounds in the biotech sector. But Arca Biopharma is managed by non-promotional scientists, and their data has been rigorously reviewed by independent researchers for publication in reputable journals. Arca is back in the news right now because the FDA approved its use of a companion diagnostic test for isolation of genotypes in Gencaro clinical trials. The fact that this relatively trivial diagnostic confirmation produced a pop in the stock on Jan. 8 is evidence that the stock has flown below the radar of the market. Such an incremental step in development would not produce such a pop if the stock was already adequately popularized.

Click to enlarge image.

Click to enlarge

Let's face it, a decades-old beta blocker is not the most sexy thing to make it into the news, and claims of "personalized medicine" are not scarce in today's media landscape. So it makes sense that Arca is not widely appreciated at this time. But Gencaro is a unique story presenting asymmetric upside.

Financial Summary and Risk Profile

Based on Market Capitalization the share price of ABIO currently values the company at exactly $26.3 million. The company has roughly half of this in cash on hand. Arca is pre-revenue so burn rate is the primary "earnings" metric which should concern investors. Arca's burn rate (expressed in ratio, of shares granted or subject to grant, divided by shares outstanding) has ticked up as trials progress, ranging from 7%-12%, which is very reasonable at this stage in the company.

By far the greatest risk to Arca investors is potential failure in Phase II trials. According to historical reports, 9 out of 10 Phase II trials in the cardio field fail. An investment in Arca right now is a bet that Gencaro will prove to be one out of 10. In turn, this risk is informed by existing data which suggest bucindolol is an outstanding treatment for genetically predisposed patients. However, these data are currently piecemeal, and there is no guarantee that real-world testing of efficacy will live up to theory. Of course, this uncertainty is where the opportunity to profit arises.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.