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Here's Why Arrowhead Pharmaceuticals Dropped 33.6% in October

By Maxx Chatsko – Nov 7, 2018 at 11:23AM

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The company de-risked the development of its potential blockbuster hepatitis B drug for a cool $250 million. Investors thought the price was too low.

What happened

Shares of Arrowhead Pharmaceuticals (ARWR -3.58%) fell more than 33% last month, according to data provided by S&P Global Market Intelligence. In addition to broad market volatility, investors were disappointed by an announcement that the company accepted a helping hand from Johnson & Johnson -- a hand that also happened to be extending an up-front payment of $175 million for access to a potential blockbuster.

While linking up with Johnson & Johnson will significantly de-risk the development and commercialization of a promising hepatitis B treatment called ARO-HBV, investors think the data reported in September were so impressive that an up-front payment of $175 million wasn't enough.

A question mark on a red card sitting against a chalkboard.

Image source: Getty Images.

So what

Arrowhead Pharmaceuticals stock has been on fire in 2018 on multiple positive developments from its pipeline. That optimism was confirmed in September when the company reported solid data for ARO-HBV from an early-stage trial, which showed that one in eight patients receiving the drug experienced a 99.9% drop in detectable circulating hepatitis B virus. The worst response observed was 93%. That strongly hints that the drug candidate will have a bright future, and investors think it will become a blockbuster with annual sales of more than $1 billion.

Of course, developing drugs -- and successfully commercializing them -- is very expensive. That nudged Arrowhead Pharmaceuticals to partner with Johnson & Johnson subsidiary Janssen to ensure ARO-HBV has the best chances of success if and when it gains marketing approval. The partnership could earn the originator up to $3.5 billion in milestone payments to go along with an up-front payment of $175 million and an equity investment of $75 million. It can earn royalty payments on top of that.

The $250 million investment will significantly de-risk the future for Arrowhead Pharmaceuticals, including the development of other promising pipeline candidates that are unrelated to the partnership with Janssen. That shouldn't be overlooked considering the company ended June with just $28 million in cash and compiled an operating loss of $44 million in the prior nine months. Nonetheless, investors apparently thought that the money changing hands wasn't enough.

Now what

It appears that investors have come around to their senses since the end of October. Shares of Arrowhead Pharmaceuticals rose 25% in the first week of November and are now up more than 330% since the beginning of 2018. While the company has a long road ahead of it that doesn't guarantee success, padding the balance sheet with nondilutive cash means there's a lot less risk going forward. Now investors simply have to wait for further updates from the pipeline.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson and has the following options: short January 2019 $140 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.

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