Arrowhead Stock Is Up 16x Since 2017, And The Rally Is Far From Over

by Trefis Team
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Despite a 3x growth since the March 18 lows of this year, at the current price of around $60 per share we believe Arrowhead (NASDAQ: ARWR), a biopharmaceutical company that develops RNA interference therapies, looks attractive and it can see significant upside from the current levels. ARWR stock has rallied from $21 to $60 off its recent bottom compared to the S&P which moved 36% over the same period, with resumption of economic activities as lockdowns are gradually lifted. ARWR stock is also up a whopping 16x from levels seen in early 2018, over two years ago.

ARWR stock has fully recovered to the levels of around $60 seen at the beginning of this year. Despite the healthy rise since the March 18 lows, we feel that the company’s stock still has potential given its recent deal with Takeda Pharmaceuticals. We discuss more in the sections below.

Some of this 16x rise since late 2017 is justified by the roughly 437% growth seen in Arrowhead revenues from 2017 to 2019, which clubbed with a 27% increase in total shares outstanding due to issuance of shares translated into a 323% surge in revenue per share (RPS). The sales are likely to trend higher over the coming years, and the stock could see a significant upside from the current levels in our view. Our dashboard, ‘What Factors Drove 1576% Change in Arrowhead Stock between 2017 and now?‘, has the underlying numbers.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has resulted in fewer hospital visits and the postponement of elective surgeries, thereby impacting the pharmaceuticals businesses in general. That said, Arrowhead’s stock price surge is due to company-specific factors. Firstly, Arrowhead rival Vertex Pharma noted that it would stop developing its potential treatment for alpha-1 antitrypsin deficiency (AATD), a genetic condition that can cause lung or liver disease, due to safety concerns. Investors likely view this as a positive for Arrowhead, which is also developing AATD drugs.

Secondly, Arrowhead announced a collaboration with Takeda Pharmaceutical  to develop a drug for the treatment of a rare inherited disorder that leads to lung disease and cirrhosis. Arrowhead will receive $300 million up front, with subsequent payments totaling up to $740 million. Takeda will receive an exclusive license to commercialize the treatment outside the US, and the companies will develop it together in the US. Note that there are no approved therapies for alpha-1 antitrypsin-associated liver disease, and it often leads to liver transplants. This means that the potential peak is very high, touted to be over $2.5 billion, compared to the company-wide revenues of $169 million.

Given the high growth, the company’s P/S ratio is also very high, though it has declined from 64x in 2018 to 35x by the end of 2019, and it will likely decline further to more reasonable levels over the coming years. That said, a decline in P/S ratio will be more than offset by growth in RPS, given the expected surge in revenues, and thereby resulting in higher levels for ARWR stock.

For now, the actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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