Seeking Alpha

Buy Arrowhead Pharmaceuticals Now At Near The Institutional Discount

About: Arrowhead Pharmaceuticals, Inc. (ARWR)
by: Trent Welsh
Trent Welsh
Long only, long-term horizon, biotech, contrarian

Arrowhead's recent equity offering provides a floor of support especially at an 11%+ discount from recent highs.

Arrowhead officially begins commercialization preparation for its wholly-owned clinical candidates.

Recent cash infusion and lucrative collaborations should keep the company on the fast track for a rapidly expanding pipeline.

Arrowhead Pharmaceuticals, Inc. (ARWR) has had a nice pullback from recent highs providing new potential investors another opportune time to buy into the company or for current owners to add to their holdings. The company's recent equity offering not only helps provide a floor of support for the company, but it also sets the foundation for its commercialization preparations. Arrowhead's nice cash hoard and lucrative collaborations should be more than enough to provide investors a rapidly growing pipeline of promising clinical candidates in 2020 and beyond.

Arrowhead's recent $266.8 million equity offering at $58 a share has helped to create a pullback in the stock of over 11% from recent highs in a stock that rocketed up over 400% in 2019.

ChartData by YCharts

Institutions were willing to buy about 4.6 million shares in this latest equity offering betting on the long-term success of the company. Investors should not be afraid to do the same as Arrowhead has plenty of future potential as it is still only a ~$6 billion company with all the potential in the world for game-changing new therapies based on its TRiM platform that will be able to target 4 separate cell types by the end of 2020. Equity offerings like this latest one could help create a "slingshot" effect in the stock with a nice pullback and pause in the stock before a return to rapid share appreciation that the company saw throughout the whole of 2019.

Arrowhead announced the appointment of a chief commercial officer at the beginning of 2020 appropriately right after its latest cash infusion. The CCO will help build the strategy, infrastructure, and team needed if and when the company's wholly-owned candidates receive FDA approval. Setting up a proper commercialization foundation can take a good year or two and is appropriate as it should have its top three wholly-owned candidates in potential pivotal trials by the end of 2020.

Arrowhead dosed the first patient of its open-labeled Phase 2 AROAAT2002 study for its ARO-AAT liver candidate in late December of 2019 to coincide with its potential pivotal SEQUOIA Phase 2/3 study which began dosing in August of 2019. The company also expects to have its two cardiometabolic candidates ARO-APOC3 and ARO-ANG3 in pivotal studies by the end of 2020 as well as it moves as quickly as it can towards FDA approval. 2020 should end with about 10 TRiM-enabled candidates in Arrowheads clinical pipeline as explosive growth is only to be expected as its platform has now been institutionally funded and its science validated and de-risked by partnerships with both Amgen Inc. (AMGN) for AMG 890 (formerly Arc-LPA) and Johnson and Johnson's (JNJ) Janssen Pharmaceutical's division for its JNJ-3989 (formerly ARO-HBV) candidate.

Arrowhead's ~$673.5 billion collaboration agreement with Amgen started with $35 million in upfront cash. It included an additional initial $21.5 million equity investment in Arrowhead stock along with a potential additional $617 million in milestone payments and up to low double digit royalties on future sales. Arrowhead has already received a $10 million milestone payment from Amgen after the first dose of AMG 890 was administered in August of 2018. Data from AMG 890's full Phase 1 study data could be coming as soon as the first quarter of 2020 with a potential Phase 2/3 filing around mid-2020.

Arrowhead's $3.7 billion licensing and collaboration agreement with Janssen included $175 million in upfront cash along with a $75 million equity investment in Arrowhead stock. Arrowhead is eligible to receive another $3.5 billion in additional milestone payments and potential further royalties on commercial sales. Arrowhead has already received a $25 million milestone payment from Janssen when it began its triple combination study featuring Arrowhead's former ARO-HBV candidate. Initial data from JNJ-3989's Phase 2b REEF-1 study could come by the end of 2020 potentially lighting a rocket under the stock as further milestone payments could be triggered along with the increased potential of an FDA approval.

Arrowhead might not even need any additional capital raises before commercialization of its lead candidate if its collaboration partnerships continue to quickly progress and trigger additional milestone payments. Or, if Arrowhead wants, they always have the option to form another partnership with one or both of their other lead candidates such as ARO-APOC3 or ARO-ANG3. Then, they could focus on setting up commercial efforts for ARO-AAT exclusively, having years to get that commercial effort fully in place, while receiving the benefits of one or two more partnerships at ~$200 million upfront each plus billions in potential milestones and royalties.

After their latest equity raise of over a quarter of a billion dollars, Arrowhead should have over a cool half a billion dollars in the bank at this time as it had a little over $300 million in cash according to the company's latest conference call. Considering that the company's expenses for fiscal 2019 came in at $107.6 million for the full year, Arrowhead has more than enough firepower to rapidly expand its pipeline in 2020 while also starting to set up their commercial foundations. I fully expect the company to have at least 10 TRiM-enabled candidates in clinical studies by the end of 2020 as it moves now as quickly as it can into new cell types to seize the greatest potential opportunities in each area.

Investors are now in prime position to acquire shares of Arrowhead as it approaches the institutional discount price of $58 a share, a full 11%+ off of recent highs. This should help provide investors a nice ~4.6 million share floor of support that institutions just bought in at by spending over $250 million on Arrowhead stock. Be prepared for a possible slingshot effect for the stock sooner than investors might think as it forges its commercialization foundations with significant potential pipeline advances scheduled in 2020 both for its lead products as well as its collaboration candidates. Arrowhead's recent capital raise takes additional equity raises off the table for 2020, barring a major M&A effort, as it has all the firepower it needs to rapidly expand its clinical pipeline. My 2020 price target for Arrowhead now stands at $100 a share or ~68% upside as its pivotal trials and new clinical candidates combined with continued game-changing JNJ-3989 study results and milestones could easily preclude a ~$10 billion market cap for this rapidly growing company. I continue to be long Arrowhead stock as one of my largest individual stock holdings. Best of luck.

Disclosure: I am/we are long ARWR. 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.