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Here's Why Arrowhead Pharmaceuticals Fell 33.9% in January

By Maxx Chatsko – Feb 6, 2020 at 6:13PM

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Investors began to question the excessive market valuation for the early-stage biopharma, but the company still has plenty of potential.

What happened

Shares of Arrowhead Pharmaceuticals (ARWR 3.47%) fell nearly 34% last month, according to data provided by S&P Global Market Intelligence. The tumble was mostly a realistic response to the stock's 410% gain in 2019, much of which was delivered in the final months of the year.

Comments made by CEO Christopher Anzalone at the J.P. Morgan Healthcare Conference didn't help. 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."

That was followed shortly thereafter by a stock downgrade from SVB Leerink, which cited the company's frothy valuation as the main argument for the pharma stock's inevitable cooldown.

A chart on a chalkboard showing a steady ascension and then a sudden decline

Image source: Getty Images.

So what

Arrowhead Pharmaceuticals has a promising technology platform based on RNA interference (RNAi), which works by silencing disease-driving genes. The company has also developed a novel delivery method to efficiently insert the RNAi payload into the liver, which could open up opportunities for treating various genetic diseases.

The stock's recent rise has mostly been driven by the early success of an experimental triple-combination therapy for chronic hepatitis B (CHB) being studied with partner Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson. In a best-case scenario, the combo could become a functional cure for CHB and generate billions of dollars in annual revenue.

Of course, the results collected to date are from only 12 individuals after 16 weeks of treatment. Janssen Pharmaceuticals and Arrowhead Pharmaceuticals plan to enroll up to 450 individuals and follow them for two years.

Knowing those details, investors might have concluded that Arrowhead Pharmaceuticals was priced for perfection at the $6.3 billion market valuation it sported at the beginning of the year. Indeed, the downgrade from SVB Leerink last month suggests a market cap of only $3.2 billion.

Now what

Arrowhead Pharmaceuticals might not be worth $6 billion today, but that doesn't mean it won't earn a much higher market valuation in the future. Investors with a long-term mindset will find a lot to like about the development-stage company. It has a promising early-stage pipeline that expands beyond CHB. In fact, the company announced promising interim results from phase 1/2a trials for two separate drug candidates focused on cardiovascular disease. The stock is definitely one to watch, so long as investors are realistic about the risk involved and the near-term potential.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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