Biotech investing isn't for the faint of heart. Clinical trial successes or failures can cause stocks to pop or drop by eye-popping amounts. For instance, Arrowhead Pharmaceuticals (ARWR +4.04%), Endocyte Inc. (NASDAQ: ECYT), and Madrigal Pharmaceuticals (MDGL +0.28%) are up a whopping 346%, 285%, and 227%, respectively, so far in 2018. Read on to learn why these stocks are skyrocketing this year and if there's still room to climb.
Hope springs eternal
Optimism that its RNAi platform would allow it to tackle hepatitis B catapulted Arrowhead's stock to about $26 in 2014. However, safety concerns led to the company shuttering most of its existing pipeline in 2016, and as a result, its shares finished 2017 below $4.
IMAGE SOURCE: GETTY IMAGES.
Investors have flocked back into Arrowhead this year, though, on hope that its revamped research and development program can avoid the risks that derailed its prior platform.
The rally started in January when collaboration partner Amgen (AMGN +0.31%) highlighted AMG 890, an RNAi therapy for atherosclerosis, on a slide at an investors conference. The highlight was encouraging because AMG 890 will be the first RNAi therapy developed under Arrowhead and Amgen's partnership to enter clinical trials. A few days later, Arrowhead added more good news, announcing that it's restarting RNAi R&D programs in two indications: antitrypsin deficiency, a genetic disease affecting about 200,000 people in the U.S. and Europe, and hepatitis B. It also said it plans to file three clinical trial applications for drugs developed using its new TRIM RNAi platform later this year.
Currently, there aren't any approved treatments that combat liver disease caused by antitrypsin deficiency, but Arrowhead hopes ARO-AAT can silence the gene responsible for producing the protein that builds up and causes fibrosis in these patients. New Zealand regulators gave a phase 1 safety study of ARO-AAT a green light in February and in June, management announced it had completed enrollment in that study.
The hepatitis B program could be an even bigger opportunity. A failure of ARC-520, Arrowhead's predecessor in this indication, was behind Arrowhead's previous development platform unraveling, but management hopes it can use lessons learned from that experience to turn ARO-HBV into a winner. Ideally, ARO-HBV will succeed as a once-monthly therapy that can be used alongside existing oral regimens someday. Regulators in New Zealand gave Arrowhead the OK to begin a phase 1/2 trial of ARO-HBV in mid-February, and the first phase of that trial completed enrollment in May. Arrowhead says that preliminary data from this study will be presented at an industry conference in November.
Arrowhead's collaboration with Amgen includes two RNAi approaches for cardiovascular disease. In 2016, Amgen licensed the rights to ARO-LPA, which it renamed AMG-890, and an undisclosed additional therapy for $56.5 million upfront, including a $21.5 million equity investment. In total, the deal could be worth up to $673.5 million if these therapies achieve all their milestones and Arrowhead can receive low double-digit royalties on AMG-890 and single-digit royalties on the undisclosed drug if they're commercialized.
Overall, RNAi gene silencing could be a big advance in these indications, but it's probably wise to temper some optimism. After all, Arrowhead's first platform didn't stumble until ARC-520 was in phase 2, so there's no guarantee Arrowhead's TRIM platform will pan out.
A new approach for prostate cancer
Endocyte's run-up stems from its decision to in-license the prostate cancer drug PSMA-617 from ABX GmbH last fall.
A radiological therapeutic, PSMA-617 binds to prostate-specific membrane antigen (PSMA), a protein expressed by prostate cancer cells, to delivers a cancer cell destroying payload.
Endocyte paid ABX GmbH $12 million up front, plus it issued ABX GmbH 2 million shares, and it gave it warrants that allow it to purchase 4 million additional shares, to gain rights to PSMA-617. It also agreed to pay up to $160 million in milestones and mid-teens royalties on eventual sales, if PSMA-617 succeeds.
Although the licensing pact was reported in October, investors really began to wake up to PSMA-617s potential in February, when Endocyte reported a 650-person phase 3 trial in metastatic prostate cancer would begin in the third quarter. The company ended up overdelivering on that promise, enrolling its first patient in June.
Prostate cancer is the most common cancer in men and the multibillion-dollar blockbusters Xtandi and Zytiga don't work in everyone. If PSMA-617 can help patients with metastatic disease who don't respond to existing options, it could carve out an important niche, especially given that the primary endpoint of its phase 3 trial is overall survival, the gold standard for clinical trials.
Of course, there's no guarantee this drug will pan out, but Endocyte unveiled data in May from a phase 2 trial that was encouraging. In phase 2, 62% of metastatic prostate cancer patients saw a greater than 50% reduction in prostate-specific antigen (PSA), a marker of this disease. An 80% or better reduction was witnessed in 44% of patients, and median overall survival for 30 patients in this trial was 13.5 months.
Only time will tell if this data can be matched in a much bigger phase 3 study, but investors are clearly optimistic it could happen.
IMAGE SOURCE: GETTY IMAGES.
Tackling a big unmet market
Though hepatitis C has historically been the greatest cause of liver transplant, treatments that provide a functional cure for hepatitis C have people thinking that the biggest cause of transplant in the future will be nonalcoholic steatohepatitis (NASH).
A so-called silent disease because it doesn't offer many symptoms, NASH is the result of a buildup of fat in the liver that's primarily due to diet. As people live longer and a fat-rich western diet gains greater acceptance globally, there's an increase in NASH incidence that presents an opportunity for companies to develop NASH-targeting drugs, including Madrigal Pharmaceuticals MGL-3196.
Back in December, Madrigal's management reported phase 2 data showing MGL-3196 reduced liver fat significantly at the 12-week mark in patients with biopsy-confirmed NASH. Patients saw a median 36.3% relative reduction in liver fat versus a 9.6% reduction in the placebo group. Also, 60.3% of all patients achieved a greater than 30% reduction, compared to 18.4% for the placebo arm of the study. Improvements were also seen in bad cholesterol levels, triglycerides, and lipoprotein, high measures of which are often associated with cardiovascular disease.
At the time, management reminded investors that the study would continue to the 36-week mark, when another liver biopsy would be done, and those updated results were unveiled to investor fanfare in May.
The updated data showed that 56% of all MGL-3196 patients had a two-point or greater improvement on in NAFLD activity score (NAS), compared to 32% of placebo patients, and that 27% of patients had NASH resolution as determined by biopsy, compared to 6% for the placebo group. Additionally, 50% of patients with NASH resolution also had fibrosis resolved.
MGL-3196's data was good enough for management to suggest a "high likelihood" of success in a longer phase 3 trial enrolling more people. Management also said it thinks there's a "potential to resolve NASH in as little as 9 months in 30% to 40% of patients."
Naturally, that kind of efficacy will need to be confirmed in phase 3, but it appears MGL-3196 puts Madrigal in a position to compete against others that are advancing NASH therapies to the Food and Drug Administration, including Gilead Sciences (GILD 0.29%) and Intercept (ICPT +0.00%).
Like Arrowhead and Endocyte, the optimism surrounding Madrigal is tied to clinical-stage progress. Unfortunately, none of these companies are rallying based on late-stage phase 3 results that could secure an FDA OK. That fact means these companies could drop as quickly as they popped if their future trials fall short. Historically, 90% of drugs that enter clinical trials fail to make it to market, and the probability of success in phase 3 is just 58.1%, based on an analysis by BIO. Given those odds, these stocks might only be suitable for aggressive investors who can withstand a setback.
Editor's note: A previous version of this article mistakenly referred to hemophilia instead of hepatitis B. The Fool regrets the error.
