Arrowhead Pharmaceuticals: Cash And A Dose Of Courage

Summary

ARWR now trades below net cash value, providing ~2.5 years of cash runway for operations if there are zero positive developments in the future.

Recent deal with Amgen for pre-clinical cardiovascular RNAi candidate is a validation of the potential for their pre-clinical candidates which utilize subcutaneous and extra-hepatic delivery platforms.

Recent restructuring including the shelving of 3 clinical-stage assets was the right strategic move, although there may be some residual value in these assets.

The time to buy is when there's blood in the streets.
-Baron Rothschild

Arrowhead Pharmaceuticals (NASDAQ:ARWR) was developing 3 clinical-stage RNAi drugs (primarily for liver diseases such as Hep B Virus), which utilized a particular intravenous delivery vehicle - intravenous Dynamic Polyconjugate (DPCiv), aka EX1 - and about a month ago the stock was in the $6/share range. The clinical studies were coming along nicely with no real issues, but then earlier this month the FDA placed a clinical hold on one the drugs utilizing this EX1 RNAi delivery system because of a death at the highest dose in a non-human primate toxicology study. While some bystanders have commented that this high a dose is not being given to patients, there is still the potential for dose accumulation, etc. and so the FDA makes a very valid point. RNAi has been historically hindered by such safety/toxicity concerns due to the delivery vehicle. So keep in mind that the real value for such companies is in their delivery platforms. After the clinical hold was announced this month, the stock sank to the ~$4.50/share range based on the expectation that the company's 3 clinical-stage drugs which utilized the EX1 delivery system still had potential but would require additional time and cash for testing to determine the cause behind the primate death.

On 11/29/2016, the company made a strategic decision to completely scrap these clinical-stage programs and cut 30% of their staff, instead of putting time and cash toward additional primate toxicology studies which they felt may not convince regulators to remove the clinical hold at the end of the day. Arrowhead will now focus efforts entirely on their pre-clinical candidates for cardiovascular disease, thrombosis/angioedema, and renal cell carcinoma which utilize different, subcutaneous and extra-hepatic delivery systems. A 60%+ selloff ensued on the morning of 11/30/2016 and the stock traded in the ~$1.60/share range.

I am a long-term investor who is primarily concerned with being protected on the downside - and if I believe that is reasonably the case - I then look for ways to win on the upside. I believe that ARWR fits the bill of a low risk, high uncertainty opportunity. I actively look for stocks that have sold off due to restructurings, temporary problems, etc. and where it can't get much worse, even if the situation is uncertain. I think the downside is now limited due to the company trading below my calculation of approximate net cash value, and I also believe there is a lot of potential upside from its pre-clinical pipeline.

Cash Position:

The company had $41.8MM in net cash at the end of June (most recent 10-Q), and then recently raised $45MM from an additional private offering (at $5.90/share), and an additional $56.5MM from Amgen via upfront payments and equity investment as part of a collaboration deal for a pre-clinical cardiovascular program utilizing the company's subcutaneous (SubQ) delivery method. Taking into account the recent equity raises, there are currently 71.5MM shares outstanding, with the stock at $1.45/share, for a $104MM market cap. The net cash balance according to my calculation is ~$143MM. Even if the company burned $20MM cash in the most recent quarter, the stock is still at an ~15% discount to net cash value.

Clinical trials and drug manufacturing cost the company $6.3MM last quarter, and the 30% reduction in the workforce should save another $1.2MM. Since the operating loss was $19.3MM last quarter, I calculate a future quarterly cash burn of $12MM. So the company likely has enough cash for the next 10 quarters (until mid-2019) if things completely stagnate the pre-clinical pipeline ends up being completely worthless. I believe that the prospects for the pre-clinical pipeline are very uncertain, but not worthless. Even if you disagree with the pipeline prospects, it may be interesting to hold the stock for a few quarters, see if management can create any positive developments, and if not then sell at what is likely to be a small loss and move on.

Pipeline:

ARWR is now focusing on the development of 3 pre-clinical candidates: ARC-F12 for thrombosis and angioedema, ARC-LPA for cardiovascular disease (licensed to Amgen), and ARC-HIF2 for renal cell carcinoma. All of these candidates utilize a different RNAi delivery system - either SubQ or extra-hepatic DPC. The company may even be able to quickly incorporate the same RNAi's that were in clinical development for liver disease into the SubQ delivery vehicle, which could result in more de-risked candidates and shots on goal.

As a validation of the SubQ platform, the company recently struck a licensing deal with Amgen for one of their pre-clinical cardiovascular RNAi therapies (ARC-LPA, which is an RNAi that decreases lipoproteinA levels) which provided an upfront payment plus potential $600MM in future milestones and additional royalties, with Amgen taking sole responsibility for clinical development and commercialization, so I think the new pre-clinical platforms are de-risked to an extent, and I view this particular deal with Amgen as a free upside option.

There is also potentially some residual value to the 3 shelved clinical-stage assets which utilize the EX1 delivery polymer. A company with deeper pockets may be willing to take the risk of conducting additional toxicity studies to try and alleviate FDA concerns.

There is a lot of uncertainty with this bet, but I think it boils down to this: you are getting a high-potential RNAi delivery system for free, with some potential upside for a candidate that has already been partnered. In the ~2.5 year timeline of cash that remains, can management bring new RNAi therapies to clinical trials utilizing the SubQ technology? If so, I think an investor coming in right now could be handsomely rewarded.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ARWR over 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.