What happened

Shares of Arrowhead Pharmaceuticals (NASDAQ:ARWR) rose 410% last year, according to data provided by S&P Global Market Intelligence. That easily topped the 28.8% gain of the S&P 500 in 2019. The pharma stock had climbed 150% by the end of August, although the bulk of the annual gains came during the fourth quarter. 

Perhaps the biggest single event of the year occurred at the American Association for the Study of Liver Diseases (AASLD) annual meeting in November. Arrowhead Pharmaceuticals and Johnson & Johnson (NYSE:JNJ) subsidiary Janssen presented promising data from two ongoing phase 1 studies in chronic hepatitis B (CHB) that touched off an epic end-of-year rally.

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So what

The pharmaceutical industry is racing to develop a functional cure for CHB, which is the leading cause of liver cancer worldwide and kills more people than malaria each year. Arrowhead Pharmaceuticals and Janssen might just be the best bet right now

The duo presented data for two combination therapies at AASLD. The most impressive results came from a triple combination of a nucleos(t)ide analog (NA), a gene-silencing drug candidate developed by Arrowhead that's now called JNJ-3989, and a third drug candidate designed to disrupt the formation of new hepatitis B viral particles called JNJ-6379. 

All 12 individuals who received the triple combination for 16 weeks achieved reductions of at least 90% in two important biomarkers of CHB. Steeper reductions are likely needed to qualify the treatment as a functional cure, but the early results are very promising because levels of the biomarkers were still declining at the 16-week mark. Janssen is now enrolling up to 450 individuals in a phase 2b study that will follow patients for up to two years.

Now what

Arrowhead Pharmaceuticals has a relatively deep pipeline with much promise. The lead drug candidate, ARO-AAT, is being studied in a phase 2/3 trial as a treatment for alpha-1 antitrypsin (AAT or A1AT) deficiency. The study could generate data to support a new drug application, but the market for the rare disease is likely to become a little crowded with various genetic medicines in development across the industry. That means most of the company's frothy valuation is wrapped up into the CHB indication. While it could deliver for shareholders, the early-stage nature of the results suggests the company's market valuation may fall a bit in the near term.