Arrowhead Pharmaceuticals (ARWR 0.91%) saw its stock price rise from $20 to over $70 last year on the basis of no news. A similar decline occurred in reverse this year -- again on the basis of no material news whatsoever. Massive speculation on the stock may be related to its flagship candidate, ARO-HBV, which has demonstrated in clinical trials to best efficacy against current standards of care for combating the hepatitis B virus (HBV). Is this potentially a functional cure for the condition, or have investors become too hyped on its potential? Let's find out together. 

DNA strands

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What are Hepatitis B and ARO-HBV?

Hepatitis B is a serious infection of the liver caused by HBV; it's spread via body fluids. The disease affects an estimated 257 million people worldwide, including about 850,000 in the U.S. Its total addressable market is estimated to scale to $3 billion globally by 2024. Although there is a vaccine available, it has no therapeutic effect if it is not given in a timely manner after exposure. 

Currently, patients living with chronic hepatitis B face risk of permanent scarring of liver tissues, or even death. As a result, they must be administered nucleotide analogues (NAs, compounds similar to naturally occurring DNA or RNA and combined with sugar) such as entecavir or tenofovir to maintain a low viral load. Unfortunately, after five years of receiving these analogues, fewer than 3% of patients will be cured of the condition. However, there may be light at the end of the tunnel. 

ARO-HBV is a ribonucleic acid interference (RNAi) therapy. In this therapeutic class, small RNA molecules are injected into a particular area of the patient's body to inhibit the expression of viral genes. ARO-HBV was specifically designed to silence the levels of DNA to RNA transcription in the HBV virus. 

How does clinical data look?

In phase 1 clinical trials, patients were given a combination of NAs and three doses of ARO-HBV over a period of two months, then evaluated in a follow-up period for a total of four months. The critical primary outcome was measuring declines in patients' HBV surface antigen levels (HBsAg), which indicates the severity of the current infection. 

Before the trial began, patients' mean HBsAg levels ranged from 3,212 IU/ml to 9,381 IU/ml across six cohorts. Four months after treatment with ARO-HBV and NAs, five of seven patients in the 100mg ARO-HBV cohort, five of six patients in the 200mg ARO-HBV cohort, six of eight patients in the 300mg ARO-HBV cohort, and five of seven patients in the 400mg ARO-HBV cohorts saw their HBsAg levels decline to less than 100 IU/ml. In other words, a vast majority of patients were functionally cured of the condition!

Is the company a buy?

Outstanding efficacy in early trials is a good indicator of success in latter investigations. Currently, Arrowhead has licensed ARO-HBV to Johnson & Johnson's (JNJ 1.46%) Janssen Pharmaceuticals subsidiary. Under this deal, Arrowhead would be eligible to receive up to $3.5 billion in milestone payments in the likely event of clinical success. If the drug is approved by the U.S. Food and Drug Administration, the company would also be eligible for mid-teen percentages in royalties of product sales. Phase 2 data from ARO-HBV are set to be released by the end of this year and would act as a significant catalyst for the stock price.

Furthermore, investors are well guarded against stock dilution while they wait for results. The company possesses more than $400 million cash on hand to fund research and development expenses, compared with a near $4 billion market cap. Additionally, Arrowhead has plenty of other promising candidates in its pipeline that are worthy of a look. Biotech investors who are interested in innovations in RNAi should definitely add Arrowhead to their portfolios.