Shares of Arrowhead Pharmaceuticals (ARWR 0.04%) fell over 14% today after the investment bank SVB Leerink initiated coverage of the stock with an underperform rating. Arguing that the company is overvalued relative to recent developments and near-term catalysts, analyst Mani Foroohar gave the stock a price target of just $32 (a market valuation of about $3.2 billion). For comparison, shares ended Friday's trading session at over $56 apiece (a market valuation of about $5.6 billion).
Of course, comments made by Arrowhead Pharmaceuticals CEO Christopher Anzalone at the J.P. Morgan Healthcare Conference haven't helped the debate over the company's market valuation. According to Biopharma Dive, Anzalone said of a potential acquisition, "It would shock me if anybody could write a big enough check to make sense to our shareholders." Investors interpreted that as an indication the company was off the table for an acquisition, which cooled speculation of a buyout that had been fueled by a solid year of progress in 2019.
As of 11:38 a.m. EST, the pharma stock was down 12.1%.
It's really not too surprising that investors and analysts are reconsidering the market valuation of Arrowhead Pharmaceuticals. While encouraging early-stage results from an experimental treatment for chronic hepatitis B (CHB) sent shares soaring last November, a market valuation of nearly $7 billion was a little too good to be true.
For instance, consider that the CHB results were from 12 individuals after 16 weeks of follow-up. The next study will enroll up to 450 individuals and follow them for two years. It's also worth noting that Arrowhead Pharmaceuticals lacks a reliable source of recurring revenue, which will force the business to burn through its cash balance at an accelerated clip as programs mature. Then again, the business exited September with $221 million in cash and raised an additional $267 million in gross proceeds in early December through a public stock offering.
Arrowhead Pharmaceuticals possesses an abundance of long-term potential on paper, but it will take time to demonstrate that potential in the real world. Investors can debate whether the business is fairly valued at $3 billion (the price target of SVB Leerink), but those with a long-term mindset shouldn't be concerned with the week-to-week stock movements. The results of ongoing clinical trials are what really matters.