Arrowhead Research (ARWR) has been on my screen as a potential Breakout buying opportunity since this biotech company’s shares started to collapse from a $17 peak back in September. The question was not whether ARWR had been unfairly punished for releasing clinical data that failed to meet unrealistically high standards (that part was clear), but rather when the punishment would stop. Based on the way the stock has started bouncing back in the last few weeks, I believe we finally have our answer.
ARWR is a classic pre-revenue biotech story. Nobody on Wall Street realistically thinks the company will be profitable before 2019 at the earliest, and yet the company’s development pipeline alone, including a novel potential hepatitis cure, still justifies price targets in the $17-$30 range. We are only getting our chance to buy in below $7 today because the latest dosing study failed to achieve management’s arbitrarily high targets, but the chart tells me the disappointment is already dissipating.
What we are left with is a company that has a drug that only needs two injections in the course of 15 days to fight hepatitis B as well as a 24-week Interferon course. The drug has already been proven safe at any reasonable dose and initial human trials are tracking as well as they did with chimpanzee subjects, where two doses were necessary to eliminate 90% of hepatitis-linked antigens. This could still be ARWR’s shot at the $1 billion a year currently spent on treating the disease in hospitals alone.
Unfortunately, management’s expectations for the drug are even higher, leading outside commentators to write the program off as a failure simply because early dosing did not translate into a true one-shot cure. In the grand scheme of things, the difference between one and two shots really doesn’t make much difference. After all, most hepatitis B therapies on the market today concentrate on managing symptoms, not eliminating the virus itself. ARWR has a potentially revolutionary product here by most standards, so hitting the target in one injection was always an arbitrary goal. If these shares were worth more than $17 when the one-shot narrative dominated the buzz, then they still deserve a price above $5-$7 even if it takes an extra dose to achieve the desired effect.
ARWR has fought its way past long-term resistance in the last week and now seems to have found a sustainable base above $6.15. The chart looks to have a clear path all the way to $12, but right now let’s start with a more modest target of $9.50. When and if any traders learn to love the new dosing outlook, the ultimate upside here may be a lot higher. Buy ARWR below $7.15. I am also naming the stock as a Top Buy in our Technical Opportunities category in place of Moneygram (MGI), which remains a buy below $8.75.