Advancements in the biomedical sciences are occurring at an astonishing rate. Every day, new discoveries are made, new medicines and technologies are advanced, and as a result, therapies of the future are closer to becoming a reality. One such therapy is RNA medicine, and investors would be wise to put both Moderna Therapeutics (MRNA) and Arrowhead Pharmaceuticals (ARWR) on their radar.
What Are RNA Medicines?
In my previous article on Moderna, I took a bit of a deep-dive into the science behind their RNA therapeutics as well as the company's recent quarter and long-term prospects. In short, RNA drugs represent a new generation of therapeutics. They're designed to manipulate the body's production of disease-related proteins and provide therapies and cures for diseases that have a well-understood genetic basis. If a disease is caused by the absence, overabundance, or mutation of a specific enzyme or protein, or even multiple enzymes or proteins, it can theoretically be alleviated using RNA drugs. Furthermore, RNA technology can also be used to develop vaccines since vaccines are based on the body creating antibodies, and antibodies are proteins.
Our genetic information is stored in our DNA. RNA is made from DNA, and proteins are then made from RNA. Proteins are enzymes, antibodies, and other functional molecules that make life possible. If someone has a disease caused by a faulty or mutated protein, one could theoretically introduce a healthy messenger RNA (mRNA) into those cells, and the cells could then create a healthy, functioning protein from that mRNA, thus alleviating or curing the disease. Alternatively, it's possible to stop a malfunctioning protein from ever being made in the first place. This can be accomplished by what is called RNA interference (RNAi), where small RNAi molecules bind to the target RNA involved in a disease and prevent cells from making the disease-related protein. RNAi can also be used to either increase or decrease the amount of a protein that is made by the body. Moderna is developing mRNA therapeutics, while Arrowhead is working on RNAi therapies.
What Does the Market Opportunity Look Like?
A recent analysis by Market Study Report, LLC. indicates that the global mRNA therapeutics market is expected to hit $610 million by 2025, with a compound annual growth rate (CAGR) of 24.1% from 2019 to 2025. Another report by the same firm suggests that the global RNAi therapeutics market should hit about $3.6 billion by 2023, factoring in a CAGR of 24% during the period of 2018 to 2023. However, I feel that these estimates could potentially be very conservative if both Moderna and Arrowhead, as well as other players in the space, are able to perfect their delivery systems, succeed in numerous clinical trials, and bring therapies to market. A report by Allied Market Research indicates that the global protein therapeutics market could hit about $218 billion by 2023, factoring in an overall CAGR of 6.5% for the period of 2017 to 2023. If the field of RNA therapeutics succeeds in ushering in the paradigm-shift that it can theoretically achieve, I think Moderna and Arrowhead could both stand to see massive revenue streams that far exceed the current estimates.
This mRNA-based drug company is developing therapies for a wide array of diseases including rare diseases, personalized cancer vaccines, and vaccines for unmet medical needs, such as Zika virus. They're also developing a proprietary nanoparticle delivery system which will enable them to get their mRNA drugs past the body's immune system and into the exact cells and tissues that they need to target. The company has strategic collaborations with AstraZeneca (AZN), Merck (MRK), and Vertex (VRTX), and as of March 31, 2019, they have over $500 million in cash and equivalents to develop their robust pipeline. Additionally, Moderna stands to see another $238 million in payments from their collaborating companies and institutions once they hit key developmental, regulatory, and commercial milestones.
Moderna recently announced its publication of Phase 1 data on two mRNA vaccines for potential pandemic flu viruses, preclinical data on their antibody to treat Chikungunya virus, and they'll be presenting data on their personalized cancer vaccines at the upcoming American Society of Clinical Oncology annual meeting. As of the writing of this article, Moderna is currently valued at ~$7.16 billion and their stock is up ~42% year-to-date, which is ~5% below their IPO price of $23 per share.
Arrowhead is using RNAi technology to silence genes that cause a variety of intractable diseases. Candidate drugs in their pipeline aim to treat cardiovascular disease, coronary heart disease, alpha-1 antitrypsin deficiency (AATD), cystic fibrosis, kidney cancer, and hepatitis B. They've also developed a unique delivery system, their Targeted RNAi Molecule (TRiMTM) Platform, which will enable them to target specific tissues in the body with their RNA medicines. Furthermore, Arrowhead recently discussed some of their data on treating dyslipidemias and fatty liver disease at the Bank of America Merrill Lynch 2019 Health Care Conference.
The company has strategic collaborations and licensing agreements with Amgen (AMGN) and the Johnson & Johnson (JNJ) subsidiary, Janssen. As of March 31, 2019, they have over $160 million in cash and equivalents. In April, Arrowhead received a $25 million milestone payment from Janssen for their ongoing Phase1/Phase 2 study into their hepatitis B treatment (JNJ-3989), and they stand to receive up to an additional $1.6 billion in milestone payments from this Janssen licensing agreement. To top that off, they could receive $1.9 billion for three additional targets involved in the Janssen collaboration if specific developmental and sales milestones are met. Additionally, as long as key milestones continue to be met, the company stands to receive royalty revenue from licensing agreements that they have with both Amgen and Janssen. Currently, Arrowhead is valued at ~$2.4 billion, their stock is up ~93% year-to-date, and shares gained 12.7% on May 21st when it was announced that the company was added to the S&P 600 Index.
What Are the Risks?
Like most early-stage biotechs, both companies primarily generate revenue via strategic collaborations and grants from private and government-sponsored organizations. According to Moderna's most recent 10-Q, the only way the company stands to generate significant revenue from the sales of prospective RNA medicines is if they're able to complete clinical development of one or more of their candidates as well as gain regulatory approval. The process from drug development through regulatory approval requires significant funding, and Moderna feels confident that as of March 31, 2019, they will be able to fund operations for the next 12 months with their current cash, cash equivalents, and investments, which total $1.55 billion. Until the time comes that they're able to generate revenue via bringing one or more therapies to market, they expect to finance their operations by public and private equity offerings, debt financings, government funding, licensing, marketing and distribution agreements, and additional strategic alliances. Future equity offerings would likely have a dilutive effect on current shareholders, lowering the share price, so the stock will most certainly experience future volatility as a result. Other causes of potential future volatility would be events such as failed clinical trials, dissolved partnerships, or key developmental and regulatory milestones not being met.
Arrowhead's funding situation is very similar, as this is the modus operandi for virtually all clinical-stage biotech companies. According to their most recent 10-Q, Arrowhead feels confident that as of March 31, 2019, they have the liquidity to fund operations for the next 12 months with their current cash, cash equivalents, and investments, which total about $286 million, and total assets that come in at about $334 million. As with Moderna, Arrowhead will continue to receive payments from their collaborators as long as specific key milestones are met. Arrowhead has been a public company since October of 2000, and their most recent public equity offering generated $56.6 million in January of 2018. Some of the same risks are involved here, as mentioned above for Moderna, namely the importance of hitting key milestones and fully succeeding in one or more clinical trials.
The Bottom Line
Both Moderna and Arrowhead have plenty of cash on hand to fund operations for the foreseeable future, and each has multiple assets in their pipelines, giving both companies plenty of shots on goal. While both are in the RNA therapeutics realm, they are taking different approaches with their technologies, and they are targeting different indications. I don't see this as an "either, or" scenario, rather I have both on my watchlist. It's important to keep in mind that only about 10% of drugs that enter clinical trials end up making it to market, so clinical-stage biotechs are an inherently risky investment. Investors may want to take small, speculative positions, or they may want to sit and watch on the sidelines for a while. Either way, keep a close eye on both companies as they work through their clinical trials because the potential rewards of success could be huge.
Disclosure: I/we 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.