Why Arrowhead Research Corp. Shares Surged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Arrowhead Research (NASDAQ: ARWR  ) , a clinical-stage biopharmaceutical company developing RNAi-based therapeutics, surged by as much as 29% after RBC Capital analyst Michael Yee, and Deutsche Bank analyst Alethia Young, initiated coverage on the company.

So what: Before the opening bell, RBC Capital analyst Michael Yee started coverage on Arrowhead with an outperform rating and a price target of $35, implying 66% upside based on yesterday's closing price. The coverage initiation comes on the heels of an OK for the company to begin a pivotal phase 2a trial of its hepatitis-B drug, ARC-520, on Monday. Yee believes there could be blockbuster potential for ARC-520. Similarly, Young initiated coverage on Arrowhead with a buy rating, and an even more robust $45 price target, implying 113% upside from yesterday's close. Young, according to Investor's Business Daily, estimates ARC-520's peak sales potential at $5.2 billion.

Now what: As a reminder, analyst actions rarely have any bearing on our long-term investing thesis, so it's probably best not to chase this move higher, or focus on their price targets. Instead, we should let ARC-520 and the remainder of Arrowhead's pipeline do the talking. For now, we're dealing with a very early stage experimental therapy which, as of now, has merely been tested for safety. It remains to be seen if ARC-520 can translate into the efficacy that Yee and Young are expecting, but I'd suggest, at least early on, that much of that optimism has already been baked into Arrowhead's share price.

Arrowhead Research may be soaring today, but it'll probably have a hard time keeping up with this top stock in 2014
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