Arrowhead Research, Focus on RNAi Therapeutics

Arrowhead Research just announced the publication of a scientific paper detailing its fundamentally new DPC delivery approach (discussed here before).  Except for noting that this study is a proof-of-concept one only and, based on recent conference presentations, clinically more relevant formulations have been developed, I am feeling more compelled to talk about my thoughts on Arrowhead’s corporate strategy than to give you are run-down of the paper that you can also read yourself here.

A Dubious Past

When I used to think of Arrowhead, a company came to mind that was constantly chasing the latest hot area in science and technology to raise the next round of money, and never pursuing anything in great detail.  And it is great detail that is required if you really want to make a product, especially a drug.  It got worse during the economic downturn when the company claimed to be a broad RNAi platform play and did not even have a lab to show.  As Benitec is demonstrating, not having a lab while acting like a platform play means that you are wasting time while dwindling away cash resources.

The Roche Acquisition- A New Beginning?

Then suddenly, Arrowhead unexpectedly emerged with the Roche RNAi asset scalp in hand.  Overnight, the little company acquired assets from Roche on which the Big Pharma had spent ~$700M. including a vibrant research organization in Madison, Wisconsin.  Although this finally got the company that missing lab, it also seemed a huge financial gamble at a time when RNAi Therapeutics sentiment was at its bleakest (late 2011, a month before the ALN-TTR01 presentation).  How would such a small cap biotech company fund the enlarged operation?  Yes, you can buy castles in France for a token Euro, but can you actually afford to live in them?

That bet likely depended on the outcome of two issues: 1) RNAi Therapeutics sentiment had to turn around in time so as to provide upward pressure to the valuations of RNAi Therapeutics companies.  This would help Arrowhead Research raise the needed capital in a shareholder-friendly manner; 2) The DPC delivery platform needed to show signs that it was finally moving into the clinic.

The first bet worked out as we know.  RNAi Therapeutics sentiment improved dramatically over the last 12 months, albeit from a very low base.  Unfortunately, Arrowhead Research happens to be the worst performing publicly traded RNAi Therapeutics company over that period.  The second bet actually also worked out as the recently reported data on decent knockdown efficacy in non-human primates at acceptable safety strongly suggest.  Moreover, the latest advances in DPC subcutaneous delivery provide the technology with added value based on technical differentiation.  Without having maintained the research operation, we would not have seen such progress.      

When Arrowhead made the acquisition, I thought it was too bold and that it would destroy most shareholder value due to dilution.  Although the stock has kept decreasing and new shares were issued, it probably has not fully destroyed it (yet)- so I have to give at least some credit to Arrowhead’s management.

What the H…? Arrowhead Buys a Peptide Library

Turns out though that the boundary between what is a visionary or a delusional company can be a blurry one.  There is reason to believe for this to be the case here after Arrowhead decided to buy the peptide targeting library from Alvos.  As peptide drug conjugates and DPCs are both targeted technologies, the company is pursuing a strategy as a Grand Targeted Therapeutics company dominating all areas of targeted therapeutics.  It also claims that the peptides and DPCs can be used synergistically.  For various reasons, forcing the Alvos peptides on the DPCs does not make sense for the company- trust me.

I agree that targeted therapeutics is the future of the industry and it is a nice vision for an ambitious company with a strong cash flow and $3B on the balance sheet.  But even if this were the case, I doubt that a realistic Board of Directors would approve such a strategy.  The reality is that getting DPC delivery to work alone is more than enough on Arrowhead's plate.  Licensing out the peptide library would just be peanuts and consume much of the energy required for more worthwhile business development efforts.

Worse, the acquisition of the peptide library makes Arrowhead look like the old technology fashion-chasing company.  This impression is further strengthened by the emphasis of the peptide library over RNAi Therapeutics in the latest investor presentations. Biotech investors have learned to avoid such increasingly rare traps. 

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