Arrowhead’s New Deal With Takeda Strengthens The Company’s Value Proposition (NASDAQ:ARWR)

Arrowhead Pharmaceuticals (ARWR) is a long-term holding of mine that just recently announced a partnership deal with Takeda (NYSE:TAK) for its ARO-AAT developmental stage therapy. I love this deal and think it yet again shows how well management is strategically and efficiently advancing an impressive pipeline through clinical development.

Arrowhead’s Deal with Takeda is a Win-Win for the Company

On October 8, Arrowhead announced that it had struck a deal with Takeda to co-develop and co-commercialize ARO-AAT, the company’s developmental therapy to treat alpha-1 antitrypsin-associated liver disease (AATLD). The partners will split US profits 50/50, and Takeda received an exclusive license to the therapy in the rest of the world for which Arrowhead will receive 20-25% royalties on net sales.

In exchange for this deal, Takeda is paying Arrowhead $300 million upfront and up to $740 million more in various potential developmental, regulatory, and commercial milestone payments.

I described the ARO-AAT opportunity in my prior article. AATLD…

is a genetic disease that results in the production and accumulation of a mutant Z-AAT protein that causes severe liver and lung damage. This is a serious unmet medical need because, while the lung manifestations can be treated with AAT augmentation therapy, there is no effective treatment for liver manifestations of the disease short of a liver transplant.

Arrowhead has already completed a positive Phase 1 trial and now has 2 additional trials of the therapy ongoing – a Phase 2/3 that could prove to be pivotal and an open-label Phase 2. We should start seeing some data from these trials late this year or early next year. I’ve seen estimates for peak sales of ARO-AAT ranging from $600 million up to $2.5 billion, so it’s clear ARO-AAT could have a meaningful impact for the company if approved.

Figure 1: Slide on ARO-AAT Mechanism of Action (source: corporate presentation)

Since I wrote that description, Arrowhead has announced interim Phase 2 data on ARO-AAT. The data was from four patients at the 24-week mark. Each patient had a liver biopsy done, and the results showed that all four patients had a decrease in serum and total intra-hepatic Z-AAT levels by 93% and 95%, respectively. Three of these patients showed a drop in intra-hepatic Z-AAT levels by 97%+. All four also showed reductions in ALT and GGT, which are both standard biomarkers of liver function.

This data is very promising and clearly must have looked strong to Takeda given the size and scope of their deal. It is definitely fair to say that it’s still preliminary though. Arrowhead has also said that it will be presenting an abstract on ARO-AAT data at a conference in November.

This deal looks fantastic for Arrowhead in multiple ways. For one thing, Takeda is particularly well suited to this deal. Takeda already makes an AAT enzyme replacement therapy, so they are extremely familiar with this space and marketing a product in it. Probably more importantly though, this deal provides Arrowhead with substantial non-dilutive capital up-front with the potential for much more down the road. This is critical for Arrowhead because of the sheer number of drug candidates the company is currently developing.

On management’s call discussing the deal, Arrowhead made it clear that the company intends to seek more partnerships like this in strategic areas of its pipeline. The company seems to have a very realistic view on the challenges of developing such a large pipeline all at the same time. I’ve been impressed with management’s ability so far in persistently looking to build long-term value, and this new deal and outlook only strengthens that.

Arrowhead’s balance sheet also looks impressive now. At the end of Q2, Arrowhead had $465 million in available cash resources. Now with the upfront payment from Takeda, Arrowhead will have over $750 million in cash at its disposal. Despite its plethora of clinical-stage programs, Arrowhead’s management has been able to keep the cash burn rate at a very reasonable level—a strong sign of good management in my opinion. Arrowhead burned about $36 million in cash in the last nine months which annualizes to just under a $50 million per year burn rate. At that rate, Arrowhead is well financed for the foreseeable future, in no small part due to its strong partnerships.

Arrowhead has Made Progress in Many Other Areas Since My Last Article

As referenced above, Arrowhead’s clinical-stage pipeline is truly impressive in both scale and the large potential markets targeted. Arrowhead had also been steadily announcing progress in many of these potential indications.

Figure 2: Arrowhead’s Pipeline (source: Arrowhead’s website)

On August 31, Arrowhead reported positive Phase 1/2 data on ARO-APOC3 for hypertriglyceridemia and ARO-ANG3 for dyslipidemia. ARO-APOC3 is intended to silence APOC3 mRNA which is thought to then produce favorable lipid changes, and this is exactly what the data showed. APOC3 expression was reduced and led to lowered triglycerides and LDL-C while actually increasing HDL-C. At maximum, this was a 75% reduction in triglycerides, a 25% reduction in LDL-C, a 33% reduction in ApoB, and a 75% increase in HDL-C. For ARO-ANG3, ANGPTL3 silencing led to the expected reductions in lipid levels which were at maximum 71% in triglycerides, 50% in LDL-C, 42% in ApoB, 34% in non-HDL-C, and 47% in HDL-C. Both therapies also showed a favorable safety profile.

Just a few days prior on August 28, Arrowhead and partner Janssen announced positive data from the AROHBV1001 phase 1/2 study on a combination of JNJ-3989 and a nucleoside analog at The Digital International Liver Congress – The Annual Meeting of the European Association for the Study of the Liver. JNJ-3989 is intended to treat patients with chronic hepatitis B and was demonstrated to provide sustained reductions in several relevant biomarkers through 48 weeks in 39% of the patients tested. Three injections of JNJ-3989 given every four weeks appeared to be safe and well-tolerated. The collaborators interpreted this data as supportive of evaluating whether JNJ-3989 dosed long term could provide a functional cure for chronic hepatitis B patients, which would obviously be a big opportunity for the companies as well as the patients.

Finally, Arrowhead recently initiated dosing in two different clinical trials, one a Phase 1b study of ARO-HIF2 in renal cell carcinoma and the other a Phase 1/2 study of ARO-ENaC in cystic fibrosis. These both represent additional large potential opportunities for Arrowhead. Renal cell carcinoma was estimated to be a $4.4 billion market in 2016, and cystic fibrosis is estimated to be a $13.9 billion market by 2025.

Despite this progress in its pipeline and support from its partnerships, an investment in Arrowhead is not without risk. The company still has no approved products, and no matter how promising a technology looks, there’s no guarantee Arrowhead will ever get any of these products to market. Also even if Arrowhead gets several of these therapies to market, disappointing sales could lead to disappointing returns for shareholders if not outright loss of capital. I view these risks as fairly limited in Arrowhead’s case though due especially to the partnerships as well as Arrowhead’s strong balance sheet and continued good management.

Arrowhead Remains Substantially Undervalued in Light of Its Long-Term Outlook

I discussed in my prior article that Arrowhead shares appeared undervalued, and I feel even more strongly about that today. Well-funded for the foreseeable future, Arrowhead management should be able to continue with its efficient development of the company’s numerous pipeline assets, creating additional value for shareholders in the process.

To quantify the scope of this opportunity a bit, I think one has to look no further than expected future earnings. Arrowhead is expected to become an earnings machine in the latter half of this decade as it will likely have numerous products hit the market by then and have the commercialization support of its big pharma partners.

Figure 3: Arrowhead Future Earnings Estimates (source: Seeking Alpha)

As you can see from Figure 3, Arrowhead trades for just 2.28x its highest year of expected future earnings. Even discounted by 10% per year, Arrowhead still only trades at a multiple of about 6.5x those future earnings which is very cheap considering how many large indications the company is targeting and the validation already received from ongoing partnerships with three big pharma companies.

Despite the new partnership with Takeda and clinical progress in several other programs, Arrowhead stock has gone nowhere for a while.

Figure 4: Arrowhead Stock Chart (source: finviz)

After briefly trading above $50 after news of the Takeda deal, Arrowhead was right back down to around $46 the next day. I continue to think that Arrowhead is a strong buy with huge long-term upside potential and very limited downside risk compared to most opportunities in the biotech.

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Disclosure: I am/we are long ARWR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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