Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Biotechs are prone to blowing up. But only a special few can make that blowup truly spectacular. 

Arrowhead Pharmaceuticals Inc., which uses a technology called RNAi to attempt to cure liver diseases, is giving up on its three most advanced drug candidates after seeing troubling safety signals in primate studies. It's hitting the big red reset button, firing 30 percent of its staff, halting all human trials and going back to the lab to try an entirely different approach. Its shares plunged 66 percent on Wednesday. 

It's an important reminder that all biotechs are risky, but this risk is asymmetric -- some companies are far more explosion-prone than others.

Ouch
Arrowhead is hitting the reset button on its drug development plans, and shares are down more than 60 percent

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 baked into their valuations.

Clinical trials fail all the time for big pharma and small biotechs alike, and investors are aware of that. But a certain subset of biotechs -- those working on newer or riskier methods of attacking a disease, such as RNAi, cell therapy, or gene therapy -- have substantially more risk. If a trial goes wrong for one of these companies, 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:

Money Furnace
It takes a whole lot of money to research and prepare to launch drugs, and many biotechs sustain years of losses before booking serious revenue
Source: Bloomberg

Compared to better-understood drug classes, there's much more that can go wrong with these novel approaches. 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 the most severe case. Alnylam (another RNAi company) shares fell 48 percent 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 restart within a few days. Then two more patients died in November. 

The Tough Road
Patient deaths badly shook the stocks of both Juno and Alnylam this year
Source: Bloomberg

The biggest effect of these clinical problems is to delay getting drugs to market, leading to lost revenue and a scramble for cash. That's certainly in Arrowhead's future (though it should get some extra cash from an RNAi partnership with Amgen announced in September):

Tick Tick
Arrowhead's cash pile is significantly depleted just as it needs more runway to survive, though a partnership with Amgen may provide a boost
Source: Bloomberg

Arrowhead was a billion-dollar company at its peak in 2014, lifted 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.

A resumption of the biotech rally might lift all of these companies for a time, but investors should remember that not all biotechs carry the same risks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net