Arrowhead's Potential

[qbeing1010]

from seeking alpha article by Kanak Kanti De, 12/28/15:

Arrowhead Research (NASDAQ:ARWR) had an excellent run over the past week, gaining nearly 10% in the last five trading sessions. But ARWR remains down sharply for the year. Year-to-date, ARWR is still down nearly 16%. With just four trading sessions left for the year, ARWR longs are headed for a disappointing year. While the performance of ARWR shares has been disappointing this year, the company has made steady progress with its ARC-520.

In September, ARWR reported very promising data for its ARC-520 from the Heparc-2001 Phase 2a clinical study. The main findings from the study were that HBeAg positive patients on a background of chronic entecavir who received a 4mg/Kg single dose of ARC-520 had a mean maximal 1.2 log or 92% reduction in circulating HBeAg. The findings showed a best reduction with the single dose of 98% or 1.7 log. This is significant because as I have noted before ARC-520 is not being developed as a single. Based on this promising data, it is possible that ARC-520 could achieve functional cure of HBV.

Currently, there are no treatment options available for HBV. If approved, ARC-520 would be addressing a significant unmet need. While there is competition in the HBV space with several companies currently developing a treatment, a paper published in ScienceDirect earlier this year noted that RNAi-based therapies can "directly target HBV transcripts with high specificity, profoundly reducing the production of viral proteins." The paper specifically mentioned about ARC-520 and that it was well-tolerated and led to significant, dose-dependent reduction in HBsAG for up to 57 days in chronic HBV patients. The paper was published before the September data from ARWR.

Based on peak sales potential of ARC-520, my fair value for ARWR is currently $14.45 per share. The valuation I must note is based on conservative assumptions, with peak penetration rate of 5%. If the sentiment on the biotech sector improves in 2016, ARWR could take off in a big way.

[Think2Succeed]

He is saying that there are no treatment options for HBV which is wrong...PEG IFN and NUCs (entecavir, tenofovir etc.) are approved treatments for HBV...he probably means no treatments that CURE HBV. I wish he would talk more about how he arrived at the $14.45 adjusted price....as to me that is also very conservative...otherwise good known info.

T2S

[qbeing1010]

This is from Dr. De's March 12, 2015 article:

Sales Estimate

The estimates for the number of people in the U.S. chronically infected with hepatitis B ranges from anywhere between 800,000 and 2 million. ARWR itself assumes 2 million patients in the U.S. are chronically infected with HBV. I have taken the mid-point of various estimates i.e. around 1.5 million. I have assumed a similar number for Western Europe as the rate of prevalence is similar in the U.S. and on the continent. According to data from CDC, an additional 5,000-8,000 persons become chronically infected with HBV in the U.S. I have once again taken the mid-point and assumed 6,500 persons become chronically infected with the disease. A similar number is assumed for Western Europe.

Based on a treatment rate of 20%, penetration rate of 5% and treatment cost of $100,000, ARC-520 gross sales in the first year could be $1.5 billion. This sales figure looks easily achievable considering that ARC-520 could possibly cure HBV, which none of the existing treatment can do. Also, the sales estimate is just 10% of what Gilead Sciences (NASDAQ:GILD) achieved with its Hep C treatment in the first year. The treatment cost is assumed at $100,000, which is in-line with the treatment cost for GILD's Hep C treatment. The penetration rate is assumed at 5% because ARWR could possibly face competition as several other companies are developing HBV treatments currently. Peak penetration rate is assumed at 15% and peak sales are estimated at more than $3 billion.

The gross revenue is adjusted in order to account for possible discounts. GILD's gross-to-net adjustment in the first year for its Hep C treatment was 22%. This is expected to increase to more than 40% in 2015 as the company has signed a number of deals with PBMs. For ARC-520, I have assumed gross-to-net adjustment of 30%.

Based on my sales estimate, discount rate of 15% (reasonable estimate for early stage biotech companies), continued growth rate of 1%, ARC-520 has a risk-adjusted value per share of $14.45.

*****

And he provides a spreadsheet on his website here: drkkd.com/506/arrowhead-research-corporation-valuation/

[Think2Succeed]

I see...thanks QB ! I wasn't aware of his spreadsheet. Well it seems to me he arrived to this low figure ($14.45) mainly because of his 5% penetration rate which in my view is way too low...I mean if you assume 100k/treatment that means you're curing HBV or have a very good treatment option against current treatments....so 5% is way too conservative....even with the competition (and by the way ARWR has 2-3 yrs lead against the competition so how is he accounting for that ? Because 2-3 yrs of a virtual monopoly in a huge unmet market like HBV will bring in lots of cash...and certainly not 5% penetration rate). Also the treatment rate of 20% is very conservative as well....many don't take the treatment because of the known ugly side-effects of PEG INF but if a drug comes to market with improved side-effects and a better efficacy profile that rate is going to increase as well.

T2S

[qbeing1010]

I like the model(s) hparch has shared with us in the past. I'm no economist or biopharma guy, but his reasoning makes a lot of sense to me.

[Think2Succeed]

Yes, I think hparch uses a more simplistic model based on total sales...he just applies a multiple to it (specific to the industry) and then he divides by the share count to arrive at an estimated share price. However, no matter how we look at it...if ARWR gets a drug on the market for HBV it's clear that the share price is going to be a multiple from what's now....the mystery will be what that multiple is going to be...

T2S

[roberto]

14.45 is definitely an improvement from the current share price and something we have not seen since September of 2014 but it seems too low to me as well. Maybe I am missing something but I don't think Dr. De included the Asian markets at all in his calculations... China alone is supposed to have 30 million chronically infected with HBV at a 20% treatment rate is equal to 6 million. Then with the 5% penetration rate, which is probably more accurate for China given the uneven distribution of wealth, equals 300,000. Even if ARC-521 gets sold for $25,000, that still equals $7.5 billion in revenue.

That seems a little excessive until you consider the fact that Harvoni and Sovaldi sales generate over $1 billion in worldwide revenue per month.

I should probably add that I used the chronically infected (HBeAG neg) because that was the most accessible statistic I had and I just wanted to present an estimate of the possible revenue from China.

In regards to your statement about the ugly side effects of PEG IFN, isn't Gilead producing a new immunomodulatory therapy?

I think it is GS-9620, but now that I look on the GILD site, I see that they have one for HBV and HIV. From what I have read, this new therapy is supposed to have less severe side-effects than PEG IFN. In addition to GS-9620, I also found an article from May 2014 about IFN-λ.

"Greater success has been found with IFN-λ and GS-9620. IFN-λ has potent anti-HBV activity in vitro and in transgenic mice[124,125], and was shown in a phase IIb trial to cause significantly greater suppression of HBV DNA and HBsAg than IFN-λ[126]. Critically, it also has improved tolerability due to the limited distribution of λ receptors outside the liver[127]. GS-9620 is an orally bioavailable small-molecule which activates Toll-like receptor 7 signalling. Administration of GS-9620 thrice weekly for 4 wk at 1 mg/kg, followed by 2 mg/kg, resulted in a prolonged 2.2 log unit reduction in HBV DNA in all three chronically infected chimpanzees[128]. Clinical trials for both IFN-λ and GS-9620 are currently on going (Tables ​(Tables88 and ​and99)."
www.ncbi.nlm.nih.gov/pmc/articles/PMC4033464/

I have never really heard of IFN-λ and so hopefully one of you guys has but these seem like possible replacements for PEF IFN that might help increase the penetration rate.

[Think2Succeed]

I agree roberto the market is huge for HBV and if ARWR gets a drug approved for HBV this is going to trade at least in triple digits. Take a look at this slide from an earlier ARWR presentation to have an idea of what we're talking about here:

Yes, Gilead is developing GS-9620 which is currently in phase 2, an oral immunomodulator via the toll-like receptor 7 (TLR-7) that showed good results so far...The problem is that it is still an unapproved treatment and that adds to the risk for ARC-520 to gain approval as a combo (2 unapproved compounds vs 1 approved+1 approved) . However management said that they plan to add one Monarch arm via a collaboration ....if that collaboration is going to be with Gilead's GS-9620 I suspect the share price is going to go up significantly regardless of the financial terms (as that will further confirm ARWR's position in the HBV race as a leader both timewise and as best KD of HBsAG).

IFN-gamma looks interesting from an efficacy point of view but it is still an interferon so I expect similar side-effects. Also is an unapproved compound for HBV and if we want the fastest route to the market via a combo therapy our best choice remains Monarch ARC-520+PEG IFN alpha...then once approved and with generated revenue the company can focus on more exotic trials...for now though it needs to distribute its limited resources in the most efficient way.

T2S

[roberto]

Thanks for clearing that up... The market would definitely be happy with a Gilead Partnership (I feel like I see a fake partnership announcement every day on twitter or YMB) and I would like to see some positive share price appreciation so I hope the collaboration will be with Gilead. The other obvious companies are Roche and Novartis.

Again, I am looking at their pipelines and I see that Roche has the RG-7795, which is meant to enhance immune responses, but it is also in Phase 2. There could be a possible collaboration but RG-7759 is also unapproved so it would be equally difficult to gain approval.

Novartis doesn't really seem to be developing any drugs for Hep B. I see CJM112 for Immune Disorders but I am guessing that would be more for a disease like Lupus or MS.

I am kind of unfamiliar with the process of getting a drug approved so how much more difficult would it be to get a combo with 2 unapproved drugs approved, compared to a combo with just one unapproved drug?

I guess my real question is : Why would Arrowhead add another cohort on for a combo that will be extremely difficult to get approved because it has two unapproved drugs?

[Think2Succeed]

I am kind of unfamiliar with the process of getting a drug approved so how much more difficult would it be to get a combo with 2 unapproved drugs approved, compared to a combo with just one unapproved drug?

This is an excerpt from the FDA guidelines in this regard:


III. DETERMINING WHETHER CODEVELOPMENT IS AN APPROPRIATE
DEVELOPMENT OPTION

Codevelopment generally will provide less information about the clinical safety and
effectiveness and dose-response of the individual new investigational drugs intended to be used
in combination than would be obtained if the individual drugs were developed alone. How much
less information will vary depending on a variety of factors, including the stage of development
at which the individual new investigational drugs cease to be studied independently. For
example, in codevelopment scenarios in which rapid development of resistance to monotherapy
is a major concern, it may not be possible or appropriate to obtain clinical data for each drug in
the combination beyond phase 1 testing. Because co-development generally will provide less
information about the individual new investigational drugs, it may present greater risk compared
to clinical development of an individual drug. Given this concern, FDA believes that
codevelopment should ordinarily be reserved for situations that meet all of the following criteria:

 The combination is intended to treat a serious disease or condition.4
 There is a strong biological rationale for use of the combination (e.g., the agents inhibit
distinct targets in the same molecular pathway or steps in disease pathogenesis, provide
inhibition of both a primary and compensatory pathway, or inhibit the same target at
different binding sites to decrease resistance or allow use of lower doses to minimize
toxicity).
 A full nonclinical characterization of the activity of both the combination and the
individual new investigational drugs, or a short-term clinical study on an established
biomarker, suggests that the combination may provide a significant therapeutic advance
over available therapy and is superior to the individual agents5
A nonclinical model
should demonstrate that the combination has substantial activity and provides greater
activity, a more durable response (e.g., delayed resistance), or a better toxicity profile
than the individual agents.
 There is a compelling reason why the new investigational drugs cannot be developed
independently (e.g., monotherapy for the disease of interest leads to resistance, one or
both of the agents would be expected to have very limited activity when used as
monotherapy).
FDA recommends that sponsors consult with FDA on the appropriateness of codevelopment
before initiation of clinical development of a combination.

To get a better idea of the entire process you can access the document here: www.fda.gov/downloads/drugs/guidancecomplianceregulatoryinformation/guidances/ucm236669.pdf

I guess my real question is : Why would Arrowhead add another cohort on for a combo that will be extremely difficult to get approved because it has two unapproved drugs?

Well...let's think about it for a minute. We know that so far ARC 520/1 is doing an excellent job at clearing the entire HBV genome while patients are on treatment, however as soon as the treatment stops the virus takes over again and this suggests that a potent immunomodulator (such as PEG IFN) might be what we need in helping the immune system to keep the virus in check after it was KD by ARC-520/1. This is the rationale behind Monarch's ARC 520/1 + ENT + PEG IFN arm. However the problem with interferon (despite the fact that is an approved treatment) as everybody knows is its side-effects so the company is trying to also include one arm that involves one of the more promising immunomodulators currently in clinical trials....it is true that the risks of approval increase in this kind of scenario but think about its potential benefits as well if successful: no more INF and probably a more modern/efficacious compound to stimulate the immune system that could lead not just to less severe side-effects but also to a better efficacy and a shorter treatment regimen. Sovaldi/Harvoni have become so successful not only because of the high cure rate but also because PEG IFN was not needed anymore...a drug that many patients couldn't tolerate. Also think about this: what if the combo is ARC 520/1+ Gilead's compound (or another big pharma's immunomodulator) and the combo works...don't you think Gilead would want to buy ARWR or at least its ARC 520/1 franchise ? The current theory says that KD of HBsAG (among other HBV proteins) is essential in having a chance of achieving FC. This might mean that no matter what combo comes to the market ARC-520/1 might be a required part of it as so far it is the only company in the world who actually showed so high levels of HBsAG KD in humans (plus first ever immune response in chimps) via RNAi. Arrowhead still needs to be careful though before entering a partnership because the company needs first to make sure that ARC-520/1 won't work by itself....because if it does it already has all it needs.

T2S