What happened

Shares of Arrowhead Pharmaceuticals (NASDAQ:ARWR) 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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.