Arrowhead Research: An Undervalued Biotech Company

Arrowhead Research (NASDAQ:ARWR) is a biotech company focusing on targeted therapeutics for oncology, infectious disease and obesity. The company is a leader in RNAi delivery-enhanced therapeutics, which many experts believe to be one of the next great frontiers in modern medicine due to their unique gene-silencing and homing properties.

On May 3rd Arrowhead closed the largest financing in the company's history, raising $36M from a group of prestigious healthcare funds and individual investors. The importance of this offering should not be underestimated. Not only did it put Arrowhead on its strongest financial footing ever, securing it with enough cash to implement their near-term strategy and accelerate advancements of RNAi-based treatments through 2015, but it is also testament to the recently published data in the scientific journal Molecular Therapy on ARC-520, Arrowhead's Hepatitis B compound, which has the potential to effectively achieve a "functional cure" for patients with chronic HBV, according to CEO Dr. Christopher Anzalone.

Arrowhead's stock represents an attractive risk/reward scenario, with the potential for asymmetrical returns over the next 6-12 months as more evidence of ARC-520's effectiveness treating HBV is substantiated in their forthcoming clinical trials. It may be too early to postulate that ARC-520 will someday be a blockbuster drug; however, given the prevalence of HBV globally, the potential is clearly there.

HBV's Commercial Opportunity

HBV is the most common form of serious liver infection. 350 million people worldwide are thought to be chronically infected with the HBV; 2 million in the US, 14 million in Western Europe, 100 million in Asia-Pac and 220 million across the remainder of the globe. Cirrhosis of the liver is an outcome of HBV, which often leads to hepatocellular carcinoma, a particularly lethal form of liver cancer. An estimated 1 million people die annually from HBV globally. Given the massive burden HBV inflicts across the globe and across all socio-economic strata, the commercial opportunity for ARC-520 is enormous.

The Pathway to ARC-520

Over the past few years Arrowhead's management made some very shrewd and strategic business decisions. The most important was their acquisition of Roche's (OTCQX:RHHBY) RNAi IP, in October of 2011, including Roche's state-of-the-art facilities, in Madison, Wisconsin, with 40 leading scientists in the RNAi field. Arrowhead's management touted this deal as being transformative; one, because it provided Arrowhead with the necessary infrastructure and research team to drive large partnerships in the industry and two, because it believed the combination of Roche's RNAi IP with their own would prove to be the pivotal moment in RNAi delivery, which up until that point had been an inhibiting factor in the RNAi's therapeutic value.

At the time of the acquisition the CEO issued this statement in a press release: "We believe this transaction positions Arrowhead as the leader in delivery, which remains the limiting factor of therapeutic RNAi. We have the platforms to optimize delivery based on tissue type, disease state, target, and siRNA chemistry. In addition, we now have broad access to use the three primary siRNA structures: Canonical, Dicer, and Meroduplex. No other company has the ability to optimize efficiency by optimizing the type of siRNA format in this way, and this is extremely powerful."

Not more than three months later, in January of 2012, Arrowhead formed a collaboration and licensing agreement with Alnylam Pharmaceuticals (NASDAQ:ALNY) that combined Arrowhead's Dynamic Polyconjugate (DPC) delivery technology and Alnylam's RNAi therapeutic payload targeting the hepatitis B virus, creating the foundation for ARC-520.

Recent Developments for ARC-520

As mentioned earlier, Arrowhead published the results of its ARC-520 animal trials in the journal Molecular Therapy. According to the February 26th press release, the data demonstrated "multi-log reductions in hepatitis B viral DNA and proteins lasting over 30 days after a single injection in animal models. This suggests that Arrowhead's RNAi-based candidate ARC-520 has the potential to treat chronic hepatitis B virus infection in a fundamentally different manner, with the goal of achieving a functional cure." The safety profile of the drug also proved to be very promising in this initial test. The company's "multi-dose studies in mice showed no diminution of knockdown activity or toxicity upon repeated injection at therapeutic doses."

Shortly thereafter, both the efficacy and safety profile of ARC-520 were again verified in chimpanzee testing data that was presented at an analyst event in New York City at the end of March. Dr. Anzalone had this to say about the treatment: "It was the first large primate to be treated with ARC-520, and its viral and s-antigen loads were many orders of magnitude higher than what we expect to see in humans. Even with this high bar, we showed that a low dose was effective and extremely well tolerated. There is currently no way to reliably knock down key HBV antigens, thought to be critical to achieving a functional cure of the disease. Our data in multiple rodent models and now in a chimpanzee with chronic HBV infection suggest that ARC-520 may be able to provide this."

This is where many of you may be rolling your eyes right now and mumbling something along the lines of "animal testing? Really?" But it is important to note that chimpanzees and humans respond very similarly to infections. Also, in the past chimpanzees have been used in the development of HBV vaccines and the data from them have proven to be predicative of both efficacy in humans and safety as well. There should be some healthy skepticism regarding the nascent stages of ARC-520 testing, but the magnitude of efficacy demonstrated in these early tests coupled with the inherent safety profile of RNAi therapeutics is what investors should be focused on. I believe Arrowhead's recent $36M capital raise is indicative of conviction these sophisticated investors have in ARC-520, as well as the delivery technology and pipeline Arrowhead currently has.

The Importance of Delivery Mechanisms and a Pipeline Briefing

The real value in Arrowhead's portfolio is in the delivery capabilities of its RNAi IP. Similar to Seattle Genetics (NASDAQ:SGEN), whose antibody-drug conjugates (ADCs) have allowed it to partner with many of the leading oncology companies, while it develops its own therapeutics, Arrowhead has the potential to partner with major pharma companies too. Its partnership with Alnylam Pharmaceuticals is a perfect example of this. Also, the company recently signed a comprehensive collaboration and license agreement with Shire AG to develop and commercialize Arrowheads targeted peptide-drug conjugates (PDCs) with Shire's therapeutics. I anticipate the company will formalize many more of these types of collaborative agreements in the near future, helping to enhance the visibility and status of the company.

Although the focus of this report and much of the recent press has been on ARC-520, Arrowhead is not just a proverbial one trick pony. The company has an anti-obesity compound currently in P1 trials, and an oncology candidate in P2 with its partner Cerulean Pharma. Although these programs add another layer of support to the company's pipeline, it is really the combination of game-changing drug delivery systems and some of the most comprehensive IP within the RNAi space that make Arrowhead a compelling investment, particularly at such an early stage in the company's development.

Six Near-term Value Drivers

1. Filing with Australian authorities in 2Q13 to launch a P1 for ARC-520.

2. Data from the ARC-520 P1 establishing the safety profile from the first human data with the DPC delivery platform.

3. Regulatory submission in Hong Kong in Q413 for a single dose P2A with ARC-520 in chronic HPV patients.

4. Data from the Phase 2A study.

5. Completion of long term GLP toxicology studies and start of a multi dose P2B study of ARC-520 2H14.

6. Completion of preclinical work to designate at least one new RNAi clinical candidate.


Biotech companies like Arrowhead Research are inherently risky to invest in given the low probability of success in clinical trials. The pharmaceutical industry is one of the most highly regulated industries and as such, successful drug trials are the exception not the rule. Approval does not guarantee success either: the right marketing strategy and execution are also critical to a drug's success in the market place. Furthermore, many pre-revenue biotech firms struggle to find financing and Arrowhead has been no exception. For years the company struggled with raising capital and teetered on the brink of de-listing, culminating in a 1-10 reverse split in November of 2011. Needless to say this investment is not without significant risk.


Despite these risks, Arrowhead Research represents an attractive and currently undervalued investment that has the potential to yield asymmetric returns in the months and years ahead, particularly if ARC-520 delivers on its promise. The company is on the strongest financial footing in its history, with over $30M in cash on its balance sheet and enough cash to fund operations through 2015. The IP Arrowhead possesses in one of the most important areas in pharmaceutical research today is best-of-breed. I believe the company to be wholly undervalued with market cap of $70M and attribute that mainly to skepticism regarding its checkered past of stock offerings, de-listing notices and reverse splits. However the company has matured a lot over the past couple of years and I think the recent $36M private placement by highly sophisticated investors is indicative of both the company's evolution and the near-term positive catalysts for ARC-520.

Disclosure: I am long ARWR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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