After years of struggling to deliver on its promise, RNA interference (RNAi) finally appears poised for commercial success. The gene-silencing technique was developed decades ago to tune the expression of genes that drive or protect against disease, but a string of clinical failures left investors scratching their heads. That's all changed thanks to the recent invention of targeted delivery technologies, which has reinvigorated interest in the genetic medicine approach.

Arrowhead Pharmaceuticals (NASDAQ:ARWR) is one company taking advantage of recent scientific advances. The development-stage biopharma has formed drug partnerships with two global leaders, grown its pipeline to 11 unique programs, and engineered targeted delivery technologies for three tissue types.

Of course, much of the early stage company's potential exists solely on paper at the moment. That means much of the pharma stock's premium value is based on hope of future success. Should investors consider Arrowhead Pharmaceuticals a buy?

A hand pulling up the last and tallest bar in a bar chart.

Image source: Getty Images.

The argument in favor

In October 2018, Arrowhead Pharmaceuticals inked a collaboration deal with Johnson & Johnson subsidiary Janssen to develop what they hope can become a functional cure for chronic hepatitis B (CHB). The development-stage biopharma earned upfront payments and equity investments totaling $250 million, but decided to realize the bounty over multiple quarters to smooth out the cash injection. That explains why the business reported operating profits in fiscal 2019 compared to operating losses in the current fiscal year.

Accounting methods aside, the RNAi developer leveraged the non-dilutive capital to rapidly invest in its technology platform. It currently sports 11 unique assets in its pipeline, including two partnered with Janssen and one partnered with Amgen. Arrowhead Pharmaceuticals ended March with $256 million in cash and a quarterly cash burn of about $25 million, although the latter will increase as pipeline assets advance into and through the clinic. 

If lead drug candidates continue to deliver, then it would help to de-risk development of and investment in earlier-stage assets. So far, investors have been delighted with encouraging results from ARO-AAT in alpha-1 liver disease and JNJ-3989 in CHB. 

Drug Candidate

Tissue Type (Disease)

Last Development Milestone

ARO-AAT

Liver (Alpha-1 liver disease)

Completed enrollment of first cohort for phase 2 trial

JNJ-3989

Liver (Chronic hepatitis B)

Janssen is conducting two phase 2b trials in CHB, comprising a two-drug combo and a three-drug combo

ARO-HIF2

Solid tumor (Renal cell carcinoma)

Expect first patients to be dosed in phase 1 trial before the end of June

ARO-ENaC

Lung (Cystic fibrosis)

Submitted regulatory submission to begin phase 1/2a trial, which would make it one of the first RNAi clinical studies of a lung disease

Data source: Arrowhead Pharmaceuticals, SEC filings.

It may not seem like a big deal at first glance, but the ability to target tissue types other than the liver is a significant advance for RNAi tools. Arrowhead Pharmaceuticals has developed its targeted RNAi molecule (TRiM) platform to simplify drug compounds and enhance delivery efficiency. Targeted delivery tools could also make RNAi drugs safer by relieving past issues with intracellular accumulation of metabolic byproducts created when cells process drug compounds and reduce manufacturing costs. 

Demonstrating early success in solid tumors and lung diseases might require the programs to be factored into the share price for the pharma stock. For example, if ARO-HIF2 shows efficacy in knocking down expression of HIF2-alpha in individuals with renal cell carcinoma, then it might suggest Arrowhead Pharmaceuticals has broad potential to treat solid tumor cancers just by changing out pieces of its delivery technology. Similarly, if ARO-ENaC shows promise in treating cystic fibrosis, then it opens the door to treating other chronic respiratory disorders ranging from chronic obstructive pulmonary disease (COPD) to asthma.

Investors might not have results in tumor or lung programs until 2021. That suggests the main drivers of the stock price will be results from ARO-AAT and JNJ-3989, both of which have blockbuster potential. 

A scientist in the lab with a dejected look on his face.

Image source: Getty Images.

The argument against

There are two primary reasons investors might hesitate to buy shares of Arrowhead Pharmaceuticals at current levels: the early stage nature of clinical data presented to date and robust competition. 

Although the biopharma wields a relatively deep pipeline, many assets are only just beginning clinical trials. Even the most advanced drug candidates, ARO-AAT and JNJ-3989, have only reported results from just a handful of patients. Considering those assets are responsible for most of the company's $3.6 billion market valuation, investors can see the risk involved should one fail a mid- or late-stage trial.

The competitive landscape might also give investors pause. There will be multiple companies that develop successful next-generation RNAi medicines. Alnylam Pharmaceuticals recently earned the first marketing approval for such a drug, while early stage peer Dicerna Pharmaceuticals offers a compelling risk-reward profile of its own. Dicerna Pharmaceuticals has formed partnerships with Alexion Pharmaceuticals, Roche, Novo Nordisk, Boehringer Ingelheim, and Eli Lilly. It also ended March with $707 million in cash and a market cap of only $1.7 billion. Investors might conclude it'd be better to risk their capital on the more youthful peer trading at a lower valuation if they're going to risk their capital at all. 

Investors also need to consider the broader landscape of genetic medicines. RNAi tools comprise one promising research area, but many gene therapies and gene editing drug candidates are taking aim at similar disease targets. Whereas RNAi tools silence disease-driving genes, newer tools offer curative potential in some cases. That could limit long-term market opportunities even in the event Arrowhead Pharmaceuticals delivers successful clinical outcomes in the near future.

Priced at a premium, but one of the best in the field

Arrowhead Pharmaceuticals is priced at a premium relative to the maturity of its pipeline, but the pipeline is arguably one of the best in all of biotech. If targeted delivery of RNAi medicines lives up to its potential in liver, lung, and tumor tissues, then it would likely drive a step-change in treatment options for some of the more stubborn diseases affecting humanity. 

Additionally, if the triple-combination therapy including JNJ-3989 replicates earlier encouraging results in larger trials searching for a functional cure of CHB, then it could become a blockbuster antiviral for one of the world's deadliest infections. Therefore, investors should realize an investment in Arrowhead Pharmaceuticals is a high-risk, high-reward play. Whether it's a buy likely depends on each individual investor's appetite for risk.