Arrowhead Research: The Next Two Years

Over the last year, Arrowhead Research has undergone a corporate transformation putting it into a position to develop important drugs and create sustained shareholder value.   After what must be a decade of chasing after the latest and hottest in nanotechnology, the company finally appears to have realized that it is in possession of a platform technology that can deliver not just dreams, but actual life-changing products: Dynamic Polyconjugates.

In the following, I will describe how I see the company go about creating value over the next 2 years.

ARC520, ARC520, ARC520

The current corporate messaging is clear: it’s all about the company’s potential cure for chronic hepatitis B, ARC520 (for review, follow this blog and Arrowhead's investor day).  ARC520, of course, is enabled by DPC delivery.  However, as its own experience and that of fellow Tekmira, Silence Therapeutics, and others have shown, the financial markets do not care much about valuing the key enabling delivery technologies in RNAi Therapeutics.  As a result, the company is focusing public attention on its lead product candidate which by now probably has commenced dosing in the first clinical study.

ARC520 has the makings of the start of an enormous franchise (note: I expect ARC520 to be followed by other versions should initial clinical results bear out the immune reactivation hypothesis).  Chronic HepB, a disease affecting over 300 million globally, has to be considered an incurable infection and there has not been an experimental medicine that can knock down the key surface antigen (HBsAg) as rapidly and potently as ARC520.  By knocking down HBsAg, it is hoped that the immune system can be reawakened to seroconvert against HBsAg which would be considered a functional cure.

We should find out whether the hypothesis is correct with the results from the first multi-dose phase IIb study which I expect to come in by the end of 2014/early 2015.  There is a slight possibility, however, that first functional cures may be observed in the single-dose phase IIa Hong Kong study with results in less than a year.

Beefing up the DPC-enabled pipeline

While ARC520 has enormous potential for which spelling out the market size would yield ridiculously high numbers, there are two main risks that need to be overcome. 

The first one is the safety of a DPC-enabled RNAi Therapeutics.  DPC has never been tested in Man before, so you always cross your fingers as it enters the clinic.  Nevertheless, the company has repeatedly reported in the peer-reviewed literature and otherwise that the safety profile, from rodents to a chimpanzee, is looking clean.  This gives me confidence that safety might actually be a strong point of the liver-targeted, short-circulating DPCs.

The second one is about the validity of the HBsAg immune reactivation hypothesis.  Key opinion leaders in the chronic HepB field support it, but as long as the direct link has not been demonstrated, it remains a risk.

As a result, the company would not do justice to DPC technology or itself by making ARC520 multi-dose results a binary event.  Instead, Arrowhead Research should add one or two additional DPC candidates to the pipeline by the end of 2014 when critical results for ARC520 are to be expected.

The first one is expected to be announced in 2013.  This should be another liver-targeted, two-molecule, intravenously infused DPC RNAi Therapeutics.  As Alnylam’s efforts show, there are numerous attractive, often orphan indications that involve gene expression in the liver.

In 2014, I would hope that a liver-targeted candidate based on their newly developedsubcutaneous DPC technology will be added to the pipeline.  Arrowhead presented first such subQ data in late 2012 so that with a few CMC refinements and gene specific development work, they might have a candidate in 2014.

Adding a subcutaneously administered DPC candidate to the pipeline would not only be progress in that this route of administration opens up new therapeutic opportunities, it would also mean that Arrowhead succeeded at where it historically has struggled with: making a single-molecule DPC at high enough yield and which can be properly analyzed.  Remember, Merck at the 2012 OTS meeting more or less announced single-molecule DPCs to be their RNAi delivery dream.  This means that Big Pharma will be and probably are already queuing up for the technology.  Big Pharma loves single-molecule solutions.

Going after the TTR cake: a proven path of value creation

Going by the analyst reports, more than half of Alnylam’s market capitalization ($2.4B) rests on their TTR amyloidosis pipeline: intravenous SNALP-based ALN-TTR02 in mid-stage phase II, and GalNAc subcutaneously delivered ALN-TTRsc in early phase I.  I believe that Arrowhead can create a candidate that is superior to both of them and thus claim a good part of that ~$1.5B in a relatively short period of time (~1.5 years from first IND to generate ALN-TTR02-type data).  Compared to ALN-TTR02, the subcutaneous mode, but equal potency could make it the preferred RNAi Therapeutic.  On safety, we have to wait, but this could be another differentiator.  Compared to ALN-TTRsc, improved efficacy and less frequent administration with lower injection volumes would make an ARC-TTRsc the winner in the market place.  Compared to phosphorothioate antisense-based ISIS-TTRsc, the winning differentiators would be potency and safety.

Arrowhead is a $70M market cap company.  It would seem like a no-brainer to go after the $1.5B market cap attributed to early-stage TTR amyloidosis data for their first subQ IND.  With a superior product and quite different molecular composition (delivery chemistry, possibly Dicer-substrate RNAi trigger) and superior clinical performance, no orphan drug designation by Alnylam or ISIS could hold it back.

Price Target: $30

In summary, by H2 2015, the time current funding is expected to last, Arrowhead Research could have demonstration of functional cure for chronic HepB (I won’t even start trying to value that), two additional product development candidates in the clinic one of which likely with a value between $1-2B, and a potent single-molecule delivery platform that will attract much attention in the industry. 

The achievements of these goals do not assume heroic operational feats.  Even in a worse-case scenario, namely that the immune reactivation hypothesis fails to live up to its expectations, ARC520 should add to the evidence of DPCs being a strong delivery platform thereby also de-risking the other two pipeline candidates.

Anybody laughing at a price target that is 15x that of its current price, by somebody who has put most of his stock market investment in that company at that, should perform an apples-to-apples comparison of clinical programs (ARC520 vs ALN-TTR) and delivery technologies (DPC vs GalNAc) with $2.4B market cap Alnylam.  Could it be that Wall Street has it all wrong?  Of course, Arrowhead Research is not the chosen one in RNAi Therapeutics on Wall Street, but I believe that clinical data on chronic HepB could lower Arrowhead’s cost of capital such that by mid-2015, a financing or business development deal would be on much improved terms.