Arrowhead’s lessons on feeding unrealistic market expectations

Seeing how overheated some biotech stocks are, it sometimes helps to remind companies of the perils of making unrealistic claims. A case in point is Arrowhead Research, whose stock crashed 44% yesterday when its hepatitis B data turned out to be nowhere near justifying the hype it had generated in August.

Given such a reality check investors might look for similar red flags in other biotech stocks. Coincidentally, on the same day Intercept Pharmaceuticals – another group with a hefty market cap – revealed that its long-awaited Flint study data would no longer be presented at AASLD, though in its case the bullet was dodged.

For those who got burned on Arrowhead, the frustration must be that the warning signs were there to see. The group’s valuation, while well off its peak in March, stood at a respectable $660m on little besides the efficacy of its RNAi project ARC-520 in a single chimp, plus initial human safety.

Management played a dangerous game when it strongly touted the all-important next catalyst – results from a phase IIa Hong Kong trial of ARC-520. In August the company’s chief operating officer, Bruce Given, said 2mg/kg, the higher of two doses, was showing depth of antigen knockdown “similar in magnitude with what we see in non-human primates ... including the hepatitis B-infected chimpanzee”.

The chimp study had shown 90% knockdown, albeit after two doses not one, and Arrowhead’s aim was to replicate this in humans, so the implication could hardly have been clearer. Yet there were two glaring warning signs: the start of a 3mg/kg cohort and hints about dosing at 4mg/kg suggested that efficacy was still insufficient; and the data were still blinded, so the company must have been guessing the efficacy.

In the event, as yesterday’s late-breaking AASLD meeting abstract revealed, the truth is way short of expectations, at a mean peak 51% knockdown for the 2mg/kg dose, falling to 22% 85 days after dosing.

Intercept unrest

In Intercept’s case it was what was not being disclosed at AASLD, rather than what was, that caused initial unrest, when the group said results from the phase II Flint trial of obeticholic acid would instead be published later in a scientific journal.

The early halting of Flint, an NIH-sponsored trial in non-alcoholic steatohepatitis (NASH), had caused Intercept stock to quadruple in January. Intercept traded off 6% before the market opened yesterday, but closed the gap as analysts said there was nothing sinister in the news, that Intercept had not agreed with the NIH where and when the data would be released, and that the abstract had not in fact been submitted for AASLD.

While there thus seems to be an innocent enough explanation, Intercept's share price fluctuation and Arrowhead’s crash show just how much is already baked into some biotechs’ valuations. Another NASH stock, Genfit, which has yet to publish phase II data, is valued at over $1bn on Euronext Paris.

Ironically, Arrowhead might still have a good shot at using RNAi to knock down the viral envelope protein known as the S antigen, or HBsAg – the goal of the Hong Kong trial (EP Vantage interview – Arrowhead looks to evolve beyond the chimp, November 1, 2013).

The dose response it has seen – 2mg/kg was more efficacious than the 39% peak mean knockdown with 1mg/kg – bodes well for the 3mg/kg arm that is still blinded, and future plans for 4mg/kg. For once, safety at higher doses does not seem to be an issue.

But protracted hyping of a “functional cure” has done management credibility no favours. Today’s letter to shareholders claiming that what Arrowhead actually said in August was that “the first two dose levels ... would not meet our goal” might just be making matters worse in terms of rebuilding investor trust.

Other biotechs should take note of the dangers of overpromising and underdelivering. From being valued at over $500m on the strength of data in a single chimp, Arrowhead clearly had a long way to fall.

To contact the writer of this story email Jacob Plieth in London at [email protected] or follow @JacobEPVantage on Twitter