Company: Arcturus Therapeutics Holdings Inc.
Ticker: NASDAQ:ARCT
Market Cap: $941M (7/14/2023)
Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) is a San Diego based global late-stage messenger RNA medicines company focused on the development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases. The company offers compelling risk/reward, as they are financially stable (cash runway until 2026, no debt) and their technology is already clinically validated. In this article I will share an overview of the company, it's current pipeline and why I see 12 bagger potential (5 year time horizon) from current level as a conservative valuation.
Disclaimer: This article is not intended to be the motivation to buy or sell stock in the discussed company. In this article I'm sharing my personal investment thesis for Arcturus Therapeutics. Feel free to use it as inspiration to also find other companies focused on RNA. Please always take responsibility for your own investment decisions. I am not a financial advisor and I am just sharing my opinion in this article. Please be aware that I usually don't write regular updates once I publish my thesis. My point of view when writing an article about a company is long term, with a 5-10 year time horizon in mind.
Structure
RNA intro
Market dynamics
Arcturus overview
History
RNA medicines & technologies
Pre-Clinical
Clinical stage pipeline
Business model
Share structure
Valuation
Risks
Conclusion
RNA intro
Ribonucleic acid (RNA) had been a forgotten molecule that started to get attention from multiple biotech companies in the years leading up to 2020 and was validated by the use case of vaccines used to fight the Covid-19 pandemic.
What is RNA and how does it differ from DNA? The description by Genome.gov gives a good overview:
"RNA is a nucleic acid present in all living cells that has structural similarities to DNA.
Unlike DNA, however, RNA is most often single-stranded. An RNA molecule has a backbone made of alternating phosphate groups and the sugar ribose, rather than the deoxyribose found in DNA. Attached to each sugar is one of four bases: adenine (A), uracil (U), cytosine (C) or guanine (G). Different types of RNA exist in cells: messenger RNA (mRNA), ribosomal RNA (rRNA) and transfer RNA (tRNA). In addition, some RNAs are involved in regulating gene expression. Certain viruses use RNA as their genomic material."
In other words, RNA is much less well-known in comparison to DNA. This is a shame as RNA can be seen as the workhorse of the human body, by being the functional form of nucleic acids that the body uses to carry amino acids from one part of the cell to the other. The main goal being the construction of cells or a response to immune challenges.
Source: genome.gov
Market dynamics
Through the validation of RNA as commercially viable, the interest in RNA therapeutics sky rocketed in recent years. Below graph shows the 2023 landscape of 124 companies with active RNA programs, segmented by approach and highest stage of development.
Today it is safe to say that there is a large market for RNA therapeutics where only sky is the limit. However, very few of the companies shown above will bring treatments to market and even if they are successful there are other underlying factors that high level observers might overlook when betting on who will be future market leaders.
Take the COVID-19 vaccine technology as example, many aren't aware of the complexity involved in IP protections and licensing deals surrounding it. A visualization of the landscape of patents that were relevant to various vaccine technology platforms is shown below.
Source: https://www.nature.com/articles/s41587-021-00912-9
The first isues due to the complex patent situation started to arise in August 2022 when Moderna filed a lawsuit against Pfizer and BioNTech claiming they infringed patents filed between 2010 and 2016. In December of the same year Pfizer and BioNTech hit back with a countersuit. The situation gets even more complex, as the three mentioned companies are not only in lawsuits with each other but also CureVac is now accusing BioNTech of infringing on its intellectual property. In addition, on June 6th 2023 Reuters reported that Promosome LLC is sueing Moderna , Pfizer and BioNTech accusing them of patent infringement.
From a public equity investors point of view all these lawsuits are problematic not only for the revenues/earnings generated through c-19 related programs but also for programs in the pipeline which could have blockbuster potential. Biotech is a game of constant failure anyways, imagine enjoying are rare win only to be stuck in multi year litigation with the stock going nowhere.
Arcturus is the only one on the graph that has full control over all of their patents. They will very likely not be disrupted by lawsuits endangering their pipeline. They have not brought a C-19 vaccine to market yet (but expect so very soon), or any other therapeutic for that matter. During the time when the pandemic started to transition into the endemic phase, some market commentators were quick to judge them as a failure. I see it very differently: Arcturus' management team saw the challenge of the pandemic as an opportunity to help, validate their technology faster than otherwise possible, use the validation for creative deal making, collect cash without shareholder dilution and then use the funds to develop their liver and lung therapies.
In this article, I will share my investment thesis for Arcturus Therapeutics and why, in my opinion, it is one of the most exciting players in the burgeoning field of RNA therapeutics and Nano Delivery Technology.
Arcturus overview
Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) is a San Diego based global late-stage messenger RNA medicines company focused on the development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases.
Their technology enables the safe & effective delivery of large RNA molecules where they need to go. In this video from 2018 CEO Joseph Payne talks about the company's long term vision and mRNA's ability to build new life inside the human body.
The stock is under the radar still with only 1,186 twitter followers (6/1/23), not much chatter from retail investors and only 4,928 followers on Stocktwits (6/1/23).
History
Arcturus Therapeutics was founded by Joseph E. Payne (President & CEO, Director of the Board) and Padmanabh Chivukula (Chief Scientific Officer and Chief Operating Officer) in 2013. Joe and Pad knew each other from their work at Nitto Denko Corp where Joe was a Senior Manager and Pad led the polymeric RNAi research department. Getting RNA to where it needs to be for it to build and create life in a living human person has always been of interest to Joe on a personal level. As the core of his scientific training is around synthetic organic or medicinal chemistry, the complexity of how to get this molecule where it needs to be as a medicine and the concept of RNA delivery was fascinating to him also as a chemist. In 2012 RNA therapeutics was a niche field and not many organizations saw the value of RNA as a viable therapeutic option. However, Joe and Pad realized that these liquid nanoparticle RNA therapeutics may have real potential, decided to quit their jobs and founded Arcturus in 2013 with $15,000. Shortly thereafter the company became part of an incubator program by Johnson & Johnson. The company grew quickly and in 2017 went public via a reverse merger with Israeli company Alcobra Ltd (old ticker was NASDAQ:ADHD). Reverse mergers were quite common even before the SPAC boom of 2020/2021. They usually were the result of a public company failing at their core business or clinical trials and choosing to merge with a private company as a strategic alternative. Reverse mergers and SPACs can have certain benefits for private companies that are active in disruptive areas or biotech that is capital intensive and needs a lot of risk appetite investors. However, it can also hold very high risks for the founders of such company as Joe experienced already 6 months after the merger was announced. In Feb 2018 Arcturus announced Joe had been dismissed as president and CEO; Mark R. Herbert, vice president of Business Development and Alliance Management, had been appointed to serve as interim president. This action was the direct result of the board of directors trying to get complete control over Arcturus and enrich themselves through shareholder funds. As an example, in one instance certain directors attempted to sell 24.9% of Arcturus’ share capital to a single purchaser at a purchase price that is more than 40% below the trading price of Arcturus common shares prior to the termination of Joe. During that time the company was on record having enough cash to fund operations for more than two years. Joe tried to fight their actions and thus was dismissed as CEO. Luckily he still was the largest shareholder at that time and filed formal requests to hold a meeting of shareholders for the purpose of selecting new members to the Arcturus Therapeutics board of directors. Rather than adhering to the law establishing a meeting date and convening said meeting, the Board of that time ignored the applicable deadlines and opted to postpone the shareholder meeting indefinitely. There was a lot of back and forth in the months that followed and Joe even had to file legal proceedings with the Israeli Court. Finally, in May 2018 "a legal settlement was agreed upon: 4 new directors were appointed to the board (Dr. Peter Farrell, Mr. Andrew Sassine, Mr. James Barlow and Dr. Magda Marquet) resulting in the resignation of Dr. Stuart Collinson, Mr. Daniel Geffken, Dr. David Shapiro, and Mr. Craig Willett."
On the one hand, this example shows the danger of SPACs/reverse mergers for shareholders but also for founders of legit companies. On the other hand, Joe's actions show that he has massive skin in the game, passion for the company and will fight for the shareholders not being diluted.
“I will continue to fight for shareholders, for their best interests, for their value and most important, to see that our exciting technologies and products are best positioned to help patients in need.” Joe Payne, May 2nd 2018
After the IPO Arcturus' team kept busy and had built assets including OTC & CF as key indications that should go into the clinic in 2020. However, in March 2020 the C19 pandemic started and as a result ARCT quickly pivoted towards c-19 vaccines development, to help during the pandemic and also to validate their technology.
RNA medicines & technologies
LUNAR® Lipid-Mediated Delivery enables multiple RNA medicines including Messenger RNA (mRNA), RNA interference (RNAi), interfering RNA (siRNA), MicroRNAs (miRNA), antisense oligonucleotides (ASO) and gene editing tools (such as CRISPR, TALEN, and meganucleases).
What makes Arcturus unique is the lipid-mediated nucleic acid delivery system they developed called LUNAR®. It is a multi-component drug delivery system that is versatile, diverse (over 250 proprietary lipids) and includes a formulation process that is demonstrated to be scalable and reproducible. In this video you can see how it works.
Arcturus developed their delivery technology because there has been the challenge in the mRNA field for decades of how to get this long, big molecule into the right cell, at the right time. A layman would ask, "why don't you make the proteins and then inject them into a human being?". That approach is not feasible as it's very complicated, time consuming and expensive. Getting those proteins to where they need to be is a massive challenge too. The better, more elegant and scalable solution is to inject a mRNA molecule that makes the protein inside of the human body.
Moreover, the challenge lies also in the fact that there are 200 different cell types in the body. Arcturus knows how to get mRNA into three of them:
The ciliated bronchial epithelial cells: The mRNA can be inhaled and get into a very valuable cell type called ciliated bronchial epithelial cells. A lot of diseases Arcturus can tackle there with limited competition.
Intravenous applications of mRNA: Getting the mRNA into hepatocytes of the liver. There's dozens of diseases that can potentially be treated there. This would also be an exciting franchise opportunity for Arcturus.
Myocytes (muscle fibers) in the arm via their vaccine franchise: Covid, flu and many other interesting vaccines that Arcturus can go after with just a simple injection in the arm, having myocytes create proteins.
Based on the above, Arcturus positions their technology as a platform. They've got a liver franchise, a lung franchise and a vaccine franchise.
This platform approach enables the company to a level of scalability and speed that is unusual for biotech. If the flagship assets of each of those franchises work, Arcturus could bring many drugs to market, while keeping the same delivery technology. All you do is tweak the mRNA molecule to make whatever it makes. It would be a way more efficient process. Potentially no need to follow the lengthy regulatory administrative process of additional phase I - III because you've already proven out the delivery technology, the mRNA in general and the manufacturing processes all worked out. There will be some regulatory check boxes that you'll have to check, but it won't be the same length. You might have to do a small bridging study, which can be completed very quickly and then you can immediately bring new treatments to the market. These are all assumptions of course and should not be seen as definitive or proven statements.
In the following sections, I will cover the pre-clinical and clinical pipeline.
Pre-Clinical
Hepatitis B
On April 27, 2023, Arcturus presented LUNAR-HBV pre-clinical gene editing mRNA platform data for Hepatitis B Virus at the 18th annual Global Hepatitis Summit Conference in Paris, France. The hepatitis B virus (HBV) is the cause of a liver infection called "Hepatitis B" when spread via blood, semen, or other body fluids from a person infected with the virus to someone who is not infected. Transcription activator-like effectors (TALEs) are the base that a class of proteins (TALEN) is based on. Featuring an array of 33 or 34-amino acid repeats TALEs are highly specific DNA-binding proteins.
In the poster presentation the team showed that Arcturus's delivery technology together with TALEN could offer a potential cure for HBV.
The full presentation can be found here and this is the poster that was presented:
Phenylketonuria (PKU) research
Phenylketonuria (PKU) is caused by a mutation in the phenylalanine hydroxylase (PAH) gene in the liver which facilitates the catabolism of phenylalanine (Phe). This can result in decreased metabolism of the amino acid phenylalanine. Untreated PKU can lead to intellectual disability, seizures, behavioral problems, and mental disorders. Around 1 in 12,000 live births are affected by this genetic disorder.
"Without a functional copy of PAH, levels of Phe in the blood and tissues rise, resulting in potentially life threatening damage to the central nervous system. Treatment options for PKU are limited, and center around adherence to a strict PKU diet that suffers from poor patient compliance." There are two approved drugs available by BioMarin Pharmaceutical Inc., one of which must be used in conjunction with the PKU diet and another that has serious immunological side effects.
In 2022 an article detailing Arcturus' preclinical research targeting PKU was released, demonstrating "the LUNAR delivery technology is capable of delivering mRNA for a replacement enzyme, the bacterial phenylalanine ammonia lyase (avPAL), into the hepatic tissue of a PKU mouse, and that the enzyme is capable of metabolizing Phe and reducing serum levels of Phe for more than five days post-transfection. The results demonstrate both the capability of LUNAR for the targeted delivery of PAL mRNA into hepatic tissue in vivo, replacing the defective PAH protein and successfully reducing serum Phe levels, thereby addressing the underlying cause of PKU symptoms."
Based on comments made during investor conferences and earnings call, it seems they will launch a program for this area.
tRNA work with Uni Hamburg
Last but not least, the article "Engineered tRNAs suppress nonsense mutations in cells and in vivo" was published in the May 2023 issue of Nature. It details results of a collaboration with scientists from the University Hamburg, Germany.
A point mutation in a sequence of DNA that results in a premature termination codon (PTC), or a nonsense codon in the transcribed mRNA (tRNA) leading to a truncated, incomplete, and nonfunctional protein product, is called nonsense mutation. Approximately 11% of all inherited genetic diseases are caused by nonsense mutations.
Moreover, tRNA-based therapies failed to deliver an optimal combination of clinical efficacy and safety. Currently there is no treatment for individuals with nonsense mutations.
In the paper the authors "introduce a strategy based on altering native tRNAs into efficient suppressor tRNAs (sup-tRNAs) by individually fine-tuning their sequence to the physico-chemical properties of the amino acid that they carry. Intravenous and intratracheal lipid nanoparticle (LNP) administration of sup-tRNA in mice restored the production of functional proteins with nonsense mutations. LNP–sup-tRNA formulations caused no discernible readthrough at endogenous native stop codons, as determined by ribosome profiling. At clinically important PTCs in the cystic fibrosis transmembrane conductance regulator gene (CFTR), the sup-tRNAs re-established expression and function in cell systems and patient-derived nasal epithelia and restored airway volume homeostasis. These results provide a framework for the development of tRNA-based therapies with a high molecular safety profile and high efficacy in targeted PTC suppression."
Clinical stage pipeline
The pandemic was a blessing and a curse for ARCT, as they could validate their technology, generate short term revenue opportunities and close a long term contract with CSL ltd (one of the world’s largest influenza vaccine companies). However, the development of their original assets was delayed due to recruiting difficulties of patients for the trials. People that are anyways burdened with a weak immune system did not take the risk to go to trial sites on a regular basis to participate in a trial. There were also other reasons, but overall I would judge ARCT coming out of the pandemic stronger than when they entered.
Currently it is the approach of ARCT to develop part of their pipeline in house and licence out other parts of the pipeline.
Pipeline of Arcturus-Owned mRNA Therapeutic Candidates
Dated 7/17/23
Ornithine Transcarbamylase (OTC) Deficiency
Known as the most common urea cycle disorder (prevalence of approximately 10,000 people worldwide) OTC deficiency leads to symptoms causing diminished cognitive ability, seizures, coma and death.
Source: Arcturus Therapeutics website
The current standard of care available for OTC-deficient patients is a low-protein diet, nutritional supplements and ammonia scavengers to help prevent the accumulation of ammonia. One of the treatment options is the drug RAVICTI (by Horizon Therapeutics) which is also part of the most expensive drugs list at $793,632 for a year of treatment. Moreover, this drug just treats the downstream effects but doesn't address the underlying cause of OTC deficiency. The fact that Amgen bought Horizon Therapeutics for $27.8 bn in Dec 2022 is testament to the high unmet need and value a treatment for OTC patients has.
ARCT-810 is a superior approach to any option that is currently available. Their messenger RNA medicine potentially enables OTC patients to make healthy functional OTC enzyme in their liver cells, essentially curing the patient. Further differentiators of ARCT-810 vs other company's developments in pipeline are that ARCT-810 is a protein replacement therapy and not gene therapy. It potentially will also be applicable for people under the age of 18. ARCT is currently enrolling subjects in a phase 2 trial.
On 6/1/23 it was announced that the U.S. Food and Drug Administration (FDA) has granted Fast Track Designation to ARCT-810. "This FDA designation provides several meaningful benefits that we expect will accelerate development and, hopefully, support the approval of this investigational therapy,” said Juergen Froehlich, MD, MBA, FCP, Chief Medical Officer, of Arcturus Therapeutics.
The next catalyst to look forward to is the interim data readout which could happen anytime between now and the end of 2023. Based on Joe's comments at an investor conference a successful data readout would proof the biological concept of protein replacement and would trigger the addition of new programs for Arcturus.
ARCT-032 Inhaled mRNA
Cystic Fibrosis (CF) is a life-shortening disease which is characterized by more than 2,000 mutations of the Cystic Fibrosis Transmembrane (CFTR) gene. Most of these mutations result in a reduction or absence of CFTR and/or function in the airways, resulting in the symptoms of cystic fibrosis. "The build-up of sticky mucus in the lungs can cause breathing problems and increases the risk of lung infections. Over time, the lungs may stop working properly. People with the condition can also develop a number of related conditions, including diabetes, thin, weakened bones (osteoporosis), infertility in males, and liver problems."
"There are over 85,000 known people with CF globally The FDA has approved several CFTR modulator therapies that assist the mutant CFTR protein to reach the cell membrane and/or increase functional ion channel activity. The CFTR modulators, while effective in some patients, are mutation-specific and therefore are not effective in all CF patients. There are no FDA-approved drugs that can treat all 2,000 CFTR mutations. Modulator therapy does not treat the underlying genetic cause of CF."
ARCT is developing a mRNA replacement therapy to deliver a new copy of the CFTR mRNA into CF patients’ airways. Their approach aims to correct the underlying cause of CF, regardless of mutation type. ARCT-032 leverages proprietary, high purity, modified mRNA in order to surpress inflammatory responses. Delivery is the key difference to other company's pre-clinical data. ARCT-032 leverages the robust LUNAR delivery technology as differentiating factor.
ARCT-032 Phase 1 enrollment and administration has been completed successfully. A trial expansion to include Cystic Fibrosis patients is planned for the third quarter of 2023.
At the JP Morgan conference Jan 2023 Joe mentioned that the CF ferret data received applause at a recent conference where it was presented. In addition, ARCT-032 has the option to be transformative for ARCT. Because it is first in class RNA, the phase 1 data expected until end of 2023 will be very meaningful.
Pipeline of Partnered mRNA Therapeutics and Vaccines
As mentioned above, ARCT leveraged the situation that developed during the pandemic to validate their platform by focusing their efforts on a covid-19 vaccine (ARCT-154). There were definitely ups and downs during that time (including the regulatory approval process in Vietnam, which ultimately didn't happen due to the Vietnam ministry of health going through an organizational restructuring). However, the team stayed on course and in November 2022 Arcturus announced signing a collaboration agreement with CSL to develop and commercialize self-amplifying mRNA vaccines. Total deal value is up to $4.5bn which includes an upfront payment but also multiple milestone payments. The market completely overlooked this deal and was positively surprised when ARCT in an earnings call gave an update on their cash runway (until 2026 at least) and also mentioned the milestone payments they already had received. Not many analysts had expected this.
In contrast to the well known mRNA vaccines (Pfizer/BioNtech, Moderna), ARCT-154 is a self-amplifying mRNA vaccine. This is a new generation of mRNA vaccine and offers certain benefits and differentiation:
Lunar delivery technology
Self amplifying (stronger T-Cell response, variant proof)
Lower dose level of 5mg is attractive (while Corminaty & Moderna are orders of magnitude higher) and also means reduced toxicology
Emphasis on purification as ARCT was always focused on the intravenous and inhaled
Manufacturing benefits: Can use lower dose, If each manufacturing run cuts down 10% time - has impact on economics and speed.
Cold chain data for Arcturus’ lyophilized vaccine platform shows favorable stability, shipping, and storage advantages. This positions it perfectly for stockpiling purposes.
Another surprise the market didn't expect was the announcement on 4/11/2023 that Meiji Seika Pharma Co. (subsidiary of Meiji Holdings), a Japanese pharmaceutical company and Japanese leader in the area of infectious disease with 18% market share, entered into a distribution agreement with “CSL Seqirus” (a part of CSL Limited) for the distribution and sales of ARCT-154 in Japan. This is another validation point for ARCT, as Meiji could have chosen amongst a wide range of vaccine producers like Pfizer, BioNtech or Moderna, but chose to close a deal with CSL for the use of ARCT-154, even though it is not even approved yet. It also means that the commercial based milestone payments will kick in much sooner than the market expected, as a New Drug Application (NDA) for ARCT-154 was submitted in Japan, leading to potential approval in 2023.
The basis for the NDA is a Phase III clinical trial in Japan of ARCT-154 that was initiated
by Meiji in Dec 2022 as part of a contractual relationship Meiji entered into with ARCT in stealth mode. The trial targeted a total of 780 adult participants, with half in the ARCT-154 group and half in a comparator group (Comirnaty, Pfizer-BioNTech).
On 7/14/23 trial data was released and showed that ARCT-154 is superior to Corminaty. The complete study details & results can be found here. The trial was another very important proof point for Arcturus's delivery tech, as it is the first (to my knowledge) direct comparison trial of sRNA to conventional mRNA.
It is now proven that ARCT-154 is superior to the currently leading c-19 vaccines while needing only a 5mg dose. The low dose has benefits in terms of the safety profile and also manufacturing efficiency. In addition, it is very easy to store ARCT-154 and thus it is perfect for stockpiling purposes.
Business model
In terms of their go to market, clinical stage biotech companies usually decide between being bought out (majority) or trying to evolve into a pharma company. There is also another path that some companies have chosen and I think ARCT will choose the path as well. The path I am referring to is working with commercialization partners. After they successfully closed their first deal with CSL, I assume that CSL is a potential partner for one or both of ARCT's other programs. It is important to know that CSL is also quite active in the rare disease treatment area and their one-time gene therapy for Hemophilia B is currently the world's most expensive drug: Hemgenix (Cost per dose: $3.5M). CSL also seems to have big plans in the USA involving RNA, as they opened a new, State-of-the-Art vaccine research and development Facility in Waltham, Massachusetts this March.
By leaving the commercialization part to bigger companies with economies of scale, ARCT team can focus on their core competencies: Research & development. When ARCT tried to go to market directly in 2021/2022, it became quite obvious, that this is not their strong trait.
However, another area of expertise that is part of ARCT core competencies and additional revenue driver is manufacturing. Together with Axcelead, Inc., the first drug discovery platform company in Japan, Arcturus Therapeutics established ARCALIS
ARCALIS is a contract development and manufacturing organization ("CDMO") for messenger RNA (mRNA) vaccines and therapeutics. ARCALIS "provides drug discovery support, CMC development, and manufacturing support services for mRNA therapeutics and vaccines to pharmaceutical and biotech companies. These services are backed by expertise accumulated in Arcturus in the fields of manufacturing technologies."
Share structure
The share structure is exactly how I like it:
Very low number of total shares outstanding: 26.56M
3.33M shares short (data from 6/30/23)
Joe owns 1,480,097 shares = 5.57 %.
Co-Founder Pad has been selling regularly, but this was part of a 144 plan.
Because of the cash runway and the deals bringing in revenue, dilution is very unlikely and if it would happen to fund new projects, would only be at a rational level.
Monthly chart
A look at the long term chart shows that even though there was a steep decline during the (biotech) bear market in 2021/2022, the stock is still in a long term uptrend. Those that bought before the 2020 run up or in recent months are in the green and can likely expect further gains. This is not the norm in many biotech stocks that have been public since 2018. The green line represents my costs basis. I had first bought the stock in the hype time of winter 2020 and then averaged down later.
Weekly chart
After being below the 200 weekly EMA from Jan 2022 ARCT finally broke resistance in May 2023, crossed the 200 weekly EMA and now seems to go higher. This move is supported by the overall market improving, positive momentum in biotech and the company fundamentals being discovered by the market.
Valuation
Capital Structure:
Market Cap: $941M (7/14/23)
Total Debt: $33M (3/31/23)
Cash: $328M (3/31/23)
Enterprise Value: $646M
Cash runway until early 2026
Taking into account the strong science, assets in pipeline and the deals with CSL/Meiji, it is quite obvious that ARCT has a lot of room to run from the current market cap level of just below $1bn. Horizon therapeutics was sold for a valuation of MC of $27.8bn (had annual revenue of $3.7bn) and they only had the focus on rare disease and not healing patients. This equates to a Price/Sales of 7.5.
Taking a conservative approach and just assuming half of the commercial milestone payments from CSL are booked in the coming years, would equate to revenue of $1.5bn. Assuming a P/S of 7.5 = $11.25bn = ~12 bagger from current level
This doesn't even include further deals for the other assets.
This calculation is based on multiple assumptions and should only reflect the potential of this company. Nobody will know for sure which valuation ARCT will reach. Please keep this in mind also for the coming paragraphs.
As I like to look at companies really long term and take into account future upside that the market is not aware of, I was fascinated by Joe mentioning the application of mRNA in the cosmetics industry in an interview in June 2021 (starting at min 34:25)
As answer to the question of when mRNA be ready for human optimization, Joe replied:
"In the near term the focus of mRNA is addressing serious unmet medical disease needs, where somebody's missing a protein or it's dysfunctional. We need to address those concerns first and then we'll start to improve upon what we already have.
Currently people are injecting Botox or toxin to their face, in order to address wrinkles. Imagine if you had a mRNA molecule that you could put into your face that makes healthy collagen, your collagen. The exact same collagen you made when you were 18. I think that's a 5 to 10 year horizon."
Even though for mRNA to be approved for cosmetic use, we can assume a time frame of +10 years, it is important to look into the history of Botox and to understand the revenue that companies make via off-label use.
Allergan plc was an Irish-domiciled pharmaceutical company focused on the areas of medical aesthetics, eye care, central nervous system, and gastroenterology.
In 1989 Allergan acquired a company that had gotten US FDA approval recently for a drug to treat lazy eye known as botulinum toxin type A, or Botox. A few years later "ophthalmologist Jean Carruthers was treating people with a tight eyelid condition with Botox injections when she realized her patients' wrinkles were going away as well. After publishing her findings, dermatologists began to pick up on the off-label use of Botox."
Off-label use can be very lucrative for companies, as the example of Botox illustrates.
Sales of Botox from 2000 - 2002:
2000: $239.5M
2001: $309.5M
2002: $439.7M
Botox only received approval for cosmetic use in 2002. In other words, Botox was already generating +1bn in total cosmetics related sales before it was even approved for this.
In 2019 AbbVie acquired Allergan for $63 bn and in 2022 global Botox Cosmetic net Revenues were $2.62 bn.
I shared this story to illustrate that similarly to how it is hard to imagine Arcturus Therapeutics generating even $1 through via cosmetics use cases today, I bet nobody at Allergan in 1989 thought that Botox would generate revenues of $2.62 bn annually in cosmetics revenue.
Risks
Based on the data communicated for the March 31st 2023 quarter, their current cash position results in a runway until early 2026, debt level is insignificantly low and thus the company risks mainly lie in execution and trial success.
Multiple data readouts expected in 2023. These data readouts could also include data that is not good or perceived as not good.
In 2020/2021 ARCT was overoptimistic and forecasted timelines wrong, leading to investor frustration. As the team is very scientific focused, I still see the risk of them being sometimes out of touch with expectation setting for Wall Street.
Public perception of mRNA could change to the worse.
ARK Invest is a 7.36% owner of the company. This could lead to downwards price pressure, if ARK has/wants to sell.
Macro uncertainty around rate hikes, recession, etc.
Conclusion
In conclusion, in biotech it is rare to find a financially secured company, that is undervalued compared to peers, under the radar of Wall Street, but has many upcoming short term catalysts that will change Wall Street's current view and lead to massive inflows. Looking at the tight share structure and level of short interest, a change in market sentiment will likely drive the price per share up quite rapidly.
But I like the long term potential of ARCT even more. During the dotcom bubble there were so many companies who had ideas that became our everyday reality later, but the companies didn't survive. Only a few like Google, Amazon, etc. survived and thrived. Drawing parallels between the covid-19 bubble and the dotcom bubble, it is obvious that Moderna and BioNtech came out of the recent stock market bubble stronger and had their company defining moment in 2020. However, I think Arcturus Therapeutics will be the surprise mRNA long term winner and one of the companies we will think about when looking back at the covid-19 stock market bubble in 5-10 years, that navigated very cleverly through the rough time and came out as transformational company.
In summary,
Founder led with skin in the game
Cash runway until early 2026 and close to no debt
Deal with CSL, one of the world’s leading influenza vaccine providers
Japan Trial data proved superiority of ARCT-154 to BNTX/PFE
Potential 2023 approval in Japan opens the door for other Asian markets and potentially EU/USA. Barda is another example of an US program currently running
New programs will be announced soon
Franchise technology that can be scaled into multiple indications rapidly without (potentially) having to go through lengthy trials
Targeting the root cause of diseases and aim to heal patients
Future Cash cow (via deals)
Upside surprise in earnings due to Japan and other country approvals. Ability to stockpile the vaccine will motivate countries to buy ARCT-154 instead of other c-19 vaccines
Multiple data readouts expected in 2023
Potential 12 bagger from current level
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Disclaimer: This blog post is purely my personal opinion and is not financial advice. Please do your own research, before taking investment decisions. I am long ARCT. No payment was received in exchange to write this article.