Investors are as bullish as they've ever been on Arrowhead Pharmaceuticals (ARWR 5.37%). There's been an avalanche of updates from the pipeline. A combination of collaboration payments and an equity investment from Johnson & Johnson have earned the pre-commercial biopharma a year or two of operations unburdened by the need to raise dilutive capital from public stock offerings. In fact, the business turned an operating profit of more than $51 million through the first nine months of fiscal 2019.
All the excitement has sent the stock soaring more than 150% since the beginning of 2019, and handed the company a market valuation in excess of $3 billion. While Arrowhead Pharmaceuticals is certainly in an advantageous position relative to most development-stage peers, the early-stage nature of the pipeline and a recent decision by Amgen to decline licensing a drug candidate suggest investors should do their best to remain grounded.
That said, could the promising biopharma be considered a buy at current levels?
Image source: Getty Images.
By the numbers
Usually, pre-commercial pharma and biopharma companies report limited actionable information on their income statements. Most don't generate revenue, and those that are lucky enough to land collaboration deals still report operating losses.
Not so for Arrowhead Pharmaceuticals. The business reported $125 million in revenue through the first nine months of fiscal 2019. Although operating expenses increased 49% in that time compared to the year-ago period, the company reported an operating profit of $51.5 million. Investors can thank Johnson & Johnson subsidiary Janssen.
|
Metric |
First 9 Months Fiscal 2019 |
First 9 Months Fiscal 2018 |
Change (YoY) |
|---|---|---|---|
|
Revenue |
$125.5 million |
$4.9 milion |
2,461% |
|
Operating expenses |
$73.9 million |
$49.6 million |
49% |
|
Operating income |
$51.5 million |
($44.7 million) |
N/A |
Data source: SEC filing. YoY = Year over Year.
Arrowhead Pharmaceuticals and Janssen inked a licensing deal for ARO-HBV, now JNJ-3989, in October 2018 (during the fiscal first quarter of 2019). The drug candidate is based on RNA interference (RNAi) technology, which treats diseases by precisely silencing the genes that cause them, and aims to cure chronic hepatitis B. Janssen bet big on the experimental treatment: The pre-commercial biopharma earned a $175 million upfront payment and a $75 million equity investment when the license was announced.
Well, sort of. Arrowhead Pharmaceuticals has decided to recognize revenue from the licensing agreement using the proportional performance method. The company estimated that the upfront payment, a subsequent $25 million development payment, the premium paid for the equity investment, and reimbursable R&D work will total $227.4 million. It has been recognizing a portion of that total each quarter, and expects to continue doing so until the ongoing phase 1/2 trial for JNJ-3989 wraps up. After that, Janssen takes control and assumes all development costs, although the pre-commercial biopharma is still eligible to receive development milestones.
It all works out the same in the end, but the use of the proportional performance method can be a little confusing for investors who thought the deal closed in fall of 2018. The important thing is that JNJ-3989 has delivered impressive results in early-stage trials to date. Additionally, Arrowhead Pharmaceuticals hasn't let its advantageous windfall go to waste.
Image source: Getty Images.
A busy pipeline, minus one
Despite the fact that Janssen agreed to pay up to $1.6 billion in development and sales milestones for JNJ-3989, the asset isn't the leading drug candidate in the pre-commercial biopharma's pipeline. That distinction goes to ARO-AAT, an experimental RNAi drug that takes aim at a rare genetic liver disease associated with alpha-1 antitrypsin (AAT) deficiency. The first patient in the phase 2/3 clinical trial was dosed in early August. Depending on the outcome of the study, the U.S. Food and Drug Administration may view the results as sufficient for a new drug application (NDA) without requiring an additional study.
Investors will need to exercise extreme patience, however, as the study will take two years to complete once all 120 patients are enrolled. Considering the only treatment for the disease is receiving a liver transplant, the results could be worth the wait, and forever change treatment for patients.
Arrowhead Pharmaceuticals also has two phase 1 trials ongoing: one for ARO-APOC3 in hypertriglyceridemia (read: elevated triglycerides) and one for ARO-ANG3 in dyslipidemia (read: elevated cholesterol). The pursuit of cardiovascular programs is intriguing. On the one hand, it represents a massive market opportunity. On the other hand, treating cardiovascular diseases with diet and exercise, or medicines simpler than an RNAi drug, seems to make significantly more sense from a clinical perspective.
That's only half-stopped Amgen from pursuing a licensing deal announced in September 2016 for two RNAi drugs, ARO-LPA and ARO-AMG1, aimed at cardiovascular disease. The original deal stated that Arrowhead Pharmaceuticals was eligible to receive up to $617 million in development and sales milestone payments. But Amgen quietly declined its option on ARO-AMG1 in early August, and the pre-commercial biopharma has reported little collaboration revenue outside the $35 million upfront payment, including just $300,000 in all of fiscal 2019.
The collaboration will change for better or for worse soon. Amgen expects to announce results from an ongoing phase 1 trial evaluating the potential of ARO-LPA to treat elevated lipoprotein levels in late 2019 or early 2020.
Is Arrowhead Pharmaceuticals priced for perfection?
If Amgen declines to continue developing ARO-LPA, then the collaboration is unlikely to survive. Such a scenario would also paint a bleak picture for the future of the wholly-owned cardiovascular programs underway at Arrowhead Pharmaceuticals.
That would give investors little to look forward to outside of ARO-AAT and JNJ-3989, although the leading pair of assets could be pretty lucrative. Some analysts think ARO-AAT could generate peak annual sales of $2.5 billion, while most of the value of the licensing deal with Janssen has yet to be realized. There's also a deal with Janssen to develop up to three additional RNAi drug candidates, which could fetch up to an additional $1.9 billion in development and sales milestone payments.
That said, at a market cap of over $3 billion, Arrowhead Pharmaceuticals is certainly priced for perfection. Investors would be better off waiting for the next update from Amgen before starting or adding to a position -- there's unlikely to be any other catalysts in the meantime. The risk of failure or walking away is relatively high, which would deny the pre-commercial biopharma additional milestone payments from the Amgen collaboration and could heavily weigh on shares, providing a better entry point.
