Things had been looking pretty good for Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) this year. Not anymore. Shares of the biotech plunged over 30% on Wednesday after the U.S. Food and Drug Administration (FDA) placed a clinical hold on a mid-stage study of experimental hepatitis B drug ARC-520. What's next for Arrowhead after the stock meltdown this week?

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Holding on

At this point, there aren't many details available about the FDA's clinical hold on the ARC-520 study. Arrowhead spoke with the FDA but hasn't received anything in writing yet.

What we do know is that the agency's concerns don't relate to the mid-stage clinical study in progress but instead focus on multiple deaths in a "non-clinical toxicology study in non-human primates." This toxicology study features Arrowhead's EX1 intravenous delivery vehicle, which is also being used in the ARC-520 hepatitis B study.

Although investors panicked on news of the clinical hold, there are reasons to remain cautiously optimistic. The doses used in the toxicology study resulting in animal deaths are much higher than doses used in studies on humans. The doses are also higher than in any other pre-clinical studies conducted by Arrowhead. Could the deaths be solely caused by these higher doses? That's what Arrowhead's team thinks -- and they could be right.

EX1 has been used more than 800 times in over 300 patients so far. Out of all these times, only three serious adverse events have occurred. Two of those involved patients having fever. The patients were given acetaminophen and continued in the study with no problems. The other patient was found to have liver cancer. However, this diagnosis was determined to be unrelated to use of EX1.  

Broader concerns?

EX1 works by delivering RNA interference (RNAi) to the liver (or other organs). RNAi is a much-heralded approach that silences genes that cause diseases. A key advantage for EX1 is that it can promote efficient endosomal escape. One of the big problems with biologic therapies is that they frequently become trapped in a membrane compartment inside some cells in the body. EX1 helps the biologic therapy to avoid being trapped and be more effective.

The bigger problem for Arrowhead is that any concerns about EX1 affect every clinical program the biotech has, not just ARC-520. Arrowhead's ARC-521, which is in an early-stage study for treating hepatitis B, and ARC-AAR, which is in an early-stage study for treating genetic lung and liver disease alpha-1 antitrypsin deficiency, both also use EX1 as their delivery platform. 

And the potential issues go beyond what Arrowhead has in its clinical pipeline. Amgen (NASDAQ:AMGN) signed a deal in September to license two of Arrowhead's RNAi therapies targeting cardiovascular disease. These therapies are in pre-clinical studies. Both use the same RNAi delivery platform as Arrowhead's clinical programs.

Arrowhead already received $56.5 million in upfront payments from Amgen. But if the worries about EX1 aren't addressed, it could put the $617 million in potential milestone payments that the small biotech could receive down the road in danger.

What's next

As you might expect, Arrowhead intends to work closely with the FDA to alleviate any concerns about EX1. The biotech has also begun to share data from the animal study in question with other regulatory authorities.

It will probably take a while for Arrowhead to complete its response to the FDA. The company must first receive the formal written notification from the agency, then pull all of the necessary data together to create a response.

After that point, it's anyone's guess as to what happens. Based on what we know now, my hunch is that the clinical hold will ultimately be lifted. Arrowhead's belief that lower doses are safe enough to continue the study makes sense to me in light of the company's other studies. If the biotech's premise is right, this could be a good buying opportunity for investors who aren't afraid of taking on considerable risk. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.