Arrowhead Pharma obliterated after ditching Hep B candidate; oh, that’s right, biotechs are risky

Shares of Arrowhead Pharmaceuticals Inc. (Pasadena CA) cratered 69% to $1.44 last week (November 28 to December 2, 2016) after the company said it would stop developing all drugs being tested on humans due to a setback in its drug-delivery technology.

Shares of @ArrowheadPharma cratered after setback in its drug-delivery technology Click To Tweet

Arrowhead focuses on making drugs using ribonucleic acid interference (RNAi) therapies, which aim to silence certain genes to curb the production of disease-causing proteins, while existing medicines work by binding to these proteins to deactivate them.

But Arrowhead previously has faced regulatory concerns over its so-called delivery vehicle that help the drugs reach their target, according to Reuters.

The trouble began last month when the US Food and Drug Administration placed a hold on a 12-patient mid-stage study testing Arrowhead’s hepatitis B treatment, ARC-520, after primates in a separate pre-clinical study died upon being given a high dose of the delivery vehicle, EX1.

After discussions with regulators and other experts, it became apparent that there would be substantial delays in all clinical programs that utilize EX1, Arrowhead said.

So the company elected to abandon all EX1-containing programs–ARC-520, ARC-521 and ARC-AAT, which were being developed to treat liver diseases. Arrowhead also said it would cut 30% of its workforce.

Arrowhead still has a surfeit of drugs in the pre-clinical stage that are being developed to be used with different delivery mechanisms. Amgen Inc. (Thousand Oaks CA) has a stake in Arrowhead and has teamed up with the company to develop gene-silencing therapies for heart disease.

However all these programs are at least one to two years away from being ready to be tested on humans, William Blair analysts said, downgrading Arrowhead’s stock to “market perform” from “outperform” and slashing its price target to $2 from $12. But analysts were also quick to note that Arrowhead’s move did not raise questions on the potential of RNAi therapies in general.

RNAi has long interested drug developers and its current proponents include Alnylam Pharmaceuticals Inc. (Cambridge MA), Ionis Pharmaceuticals Inc. (Carlsbad CA) and privately held Quark Pharmaceuticals Inc. (Fremont CA). But success has been hard to come by.

Alnylam last month said it would abandon a drug being developed to treat a rare genetic condition that can cause heart failure, after data showed that patients given the drug were more likely to die than those on placebo.

Steve’s Take:

I’m not certain whether I’m on solid footing, but it sure seemed like several healthcare companies used the cover of the semi-surreal presidential election to divulge some otherwise somber (alright, damaging) information.

Tuesday (November 8, 2016) was, of course, Election Day, when voters picked Donald Trump over Hillary Clinton to become the next president. It was also a day that a couple of struggling publicly traded companies chose to announce their quarterly earnings.

Other embattled monikers were also doing so the day before or after, when headlines will were dominated even more by election results. The timing created the possibility that any news, good or bad (more likely bad, given these companies’ recent histories), be buried as investors focused their attention on the staggering implications of the final election numbers.

The list of such companies reporting on or right around Nov. 8 includes Valeant Pharmaceuticals and Mylan Labs. So is the timing coincidental, or premeditated?

A review of past announcements suggests that two of the companies have broken with recent tradition in scheduling this quarter’s earnings releases, argues Fortune.

Valeant, the troubled Canadian drug company, had reported its third-quarter earnings between Oct. 19-31 since 2013, and between Nov. 2-5 between 2009 to 2012. Shares of Valeant have fallen 85% since the start of the year, as the company continues to weather controversy surrounding its drug price hikes and questionable accounting practices in relation to specialty pharmaceutical company Philidor.

Generic-drug company Mylan also broke a past pattern: Since 2009 Mylan has reported third-quarter earnings between Oct. 25-31. The company was at the center of a firestorm earlier this year for hiking the price of its widely used allergic-reaction treatment, the EpiPen, to $608 for a package of two, an increase of about 500% over the past decade.

As outrage grew, the company boosted the discounts patients can receive, but not before the stock hit record lows ahead of CEO Heather Bresch’s testimony before the House in September. Overall, shares of Mylan have fallen 35% year-to-date.

But the day before the election, RNAi biotech Arrowhead quietly posted some terrible news that its hep B candidate, ARC-520, was placed under a clinical hold by the FDA. As of now, this candidate, along with a host of others and 30% of its staff, are to be terminated as the biotech frantically seeks to refocus.

Much of its work had revolved around the EX1 delivery vehicle, but those created under this system–hep B meds ARC-520, ARC-521, and ARC-AAT for alpha-1 antitrypsin deficiency–will now all be scrapped, according to Ben Adams at FierceBiotech.

ARC-520 had once been flaunted as a potential cure for hep B, with the entire company and its platform formerly said to be a trillion-dollar opportunity. This past week, its market cap had fallen to under $90 million.

To shore up the losses, Arrowhead will also be cutting 30% of its workforce (including clinical and R&D teams), which is “intended to extend its cash runway into 2019.” The company added that “a more ‘streamlined’ company would make progress for its remaining pipeline happen more rapidly.”

Arrowhead said the decision to stop work on all three candidates came during “ongoing discussions with regulatory agencies and outside experts,” where management said, “it became apparent that there would be substantial delays in all clinical programs that utilize EX1, while the company further explored the cause of deaths in a nonclinical toxicology study in non-human primates.”

Biotechs are prone to explosion. But only a special few can make that blowup truly spectacular. Arrowhead now fits that mold; it’s hitting the big red reset button.

It’s an important reminder that all biotechs are risky, but this risk is asymmetric–some companies are far more explosion-prone than others, points out Max Nisen at Bloomberg.

Biotechs have all of your standard corporate risks–accounting, managerial, and balance-sheet–which are amplified by the fact that they often suffer massive losses and generate no revenue for years. Firms have to carefully manage their cash just to operate, let alone overcome any kind of setback.

But biotechs also have a wide variety of scientific risks that aren’t always factored into their valuations. Clinical trials routinely fail for big pharma and small biotechs alike, and investors are mostly aware of that.

It’s a certain subset of biotechs–those working on newer or riskier methods of attacking a disease, such as RNAi, cell therapy, or gene therapy– that have substantially more risk. If a trial runs amok for one of these impudent youngsters, or a safety signal emerges, then investors don’t just question an individual drug, but the firm’s entire approach to medicines, known as its “platform.”

These riskier treatments are also often some of the most expensive to research and test. On the list of biotechs that are burning cash the fastest, you can see many firms–such as Alnylam Pharmaceuticals Inc., Juno Therapeutics Inc., and Bluebird Bio Inc.–that are working on potentially riskier approaches.

Compared to better-understood drug classes, there’s much more that can go wrong with these novel approaches, Nisen points out. Delivery mechanisms are often complicated (apparently a problem for Arrowhead). Manufacturing is complicated and expensive. Side effects can be hard to predict and manage.

Arrowhead is not the first company to run into possible platform issues this year; it’s just one of the cruelest cases. Alnylam (another RNAi company) shares fell 48% in October after patient deaths caused it to halt development on its lead drug. It gave up on another drug due to toxicity issues in September, though analysts continue to defend its platform.

Juno, which develops cell therapies for blood cancers, had its clinical trial halted after three patients died of brain swelling, but the FDA allowed it to resume within a few days. Then two more patients died in November.

Still, the harshest consequence of these clinical disasters is to delay getting needed drugs to market, leading to lost revenue and a dash for cash. That grim outlook is now Arrowhead’s future.

Consequently, Arrowhead will now focus on another process, namely the subcutaneous (subQ) and extrahepatic delivery system, and said in a statement that it, “intends to advance to the clinic two previously unannounced HBV and AATD programs using our subQ platform.”

It will also continue work on its $674 million cardiovascular RNAi pact with Amgen, which was signed back in September, as well as on preclinical med ARC-F12 in clear and renal cell carcinoma, and several other early-stage candidates.

Arrowhead was a billion-dollar company at its peak in 2014, buoyed by a rally in biotech stocks. Its market cap is now down to about $100 million. Many biotech firms with unproven approaches still command valuations ranging from $2 billion to $4 billion and higher. Among them there is likely another Arrowhead.

At the moment however, the stunning election results are wreaking havoc on healthcare shares, and, in particular, the biotech sector. Up 2% as a group one week, down 2% the next as everyone consults their favorite crystal ball trying to discern the temperament of President-elect Trump toward the industry. But whether the future path is a stairway to heaven or bridge across the River Styx is far from certain.

Steve's Take: @ArrowheadPharma shows that #biotech is a flat-out risky business Click To Tweet

Bottom line, though, as Arrowhead instructs, is biotech is flat-out risky. No matter who’s in the Oval Office.