Arcturus Therapeutics' ARCT-032: Might Be The Next Breakthrough In Cystic Fibrosis

seekingalpha04-23

Arcturus Therapeutics' ARCT-032 gene therapy for cystic fibrosis has been designated as an "orphan drug" in the U.S. and Europe.The therapy has the potential to generate significant revenues, similar ...

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Cystic Fibrosis\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-23 18:01 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685225-arcturus-therapeutics-arct-032-might-be-the-next-breakthrough-in-cystic-fibrosis><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Arcturus Therapeutics' ARCT-032 gene therapy for cystic fibrosis has been designated as an \"orphan drug\" in the U.S. and Europe.The therapy has the potential to generate significant revenues, similar ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685225-arcturus-therapeutics-arct-032-might-be-the-next-breakthrough-in-cystic-fibrosis\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0348805143.USD","symbol_name":"ALLIANZ ENHANCED ALL CHINA EQUITY \"A\" (USD) 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designated as an \"orphan drug\" in the U.S. and Europe. Cystic fibrosis (CF) is considered a rare condition, caused by a genetic mutation. CF is more prevalent in Caucasian descendants. In the U.S. alone, it has been estimated that around 1 in 2500 babies are diagnosed with CF, while in Europe and the United Kingdom, the rate is slightly higher, with 1 in 2000 babies being diagnosed with CF. ARCT has not officially disclosed the specifics of their ARCT-032 therapy candidate in terms of price or dose regime (single or multiple doses). However, considering that Vertex Pharmaceuticals (VRTX) has been able to cash in over $8 billion in 2023 alone with their Trikafta treatment, I would expect ARCT's inhalable gene therapy, which it was sponsored by the Cystic Fibrosis Foundation, to be able to retrieve similar revenues at peak sales. Overall, if/when ARCT achieves full regulatory approval and commercialization of their CF treatment, it should be able to report positive figures in terms of revenue growth and net income. Therefore, in the mid- to long-term, I would expect a positive response regarding ARCT's shareholder's returns, hence supporting my speculative \"Buy\" rating. Overview Arcturus Therapeutics is focused on developing gene therapies, including both carriers and genetically active molecules, for the treatment of respiratory and liver conditions. Recently, ARCT in partnership with CSL Seqirus, gained regulatory approval for their first in-class self-amplifying COVID-19 vaccine, which is going to be rolled out in Japan in 2024, and it has the opportunity to expand into the U.S. and EU once it obtains regulatory approvals. In addition, ARCT's cystic fibrosis treatment candidate (ARCT-032, also known as LUNAR-CF), received the orphan drug label for cystic fibrosis from the FDA and the European Commission. The company also holds a program (LUNAR-OTC) in Phase 2 clinical trials, targeting the ornithine transcarbamylase deficiency (OTCD), a rare disease affecting a person's capacity to process urea. Considering that the company holds the IP for the carrier molecules (vectors) as well as the genetically active molecules, both of them specifically designed for targeting the genetic condition of interest, I believe this company has valuable know-how that brings value to the market. Moreover, once they have gained access to commercialise their products, it should be relatively easy to apply a similar strategy to develop novel therapies for other applications. In this sense, I believe targeting cystic fibrosis, OTC, as well as the COVID-19 vaccines may just be a clever business strategy to focus on profitable and relatively easy to-achieve therapeutic niches that may enable ARCT to release therapy candidates with an accelerated path to regulatory approvals and relatively low numbers of competitors on the market. On the other hand, when analysing their financial status, to date, Arcturus has been consistently reporting losses, mostly due to the expensive clinical trials and the lack of commercial products. In terms of returns on investment, since inception, ARCT has underperformed compared to the SP500 (see image below), reporting total returns of -78.51% in the last 10 years, while in the same time frame, the SP500 total returns are 166.57%. Arcturus Therapeutics vs SP500 historical performance (Seeking Alpha) Despite the expected revenues associated with the commercialization of the COVID-19 vaccine in Japan, the company has a short financial runway until 2027. However, if the ARCT-032's clinical trial results (due to be public by Q22024) are positive, the company will likely be on good track to obtain the regulatory approval and start commercialising their CF treatment well before 2027. Cystic Fibrosis Cystic Fibrosis (CF) is one of the most common genetic diseases worldwide. In terms of ethnicity, CF is more prevalent in Caucasian descendant individuals than other ethnicities. The disease is caused by mutations in a gene known as Cystic Fibrosis Transmembrane Conductance Regulator (CFTR). This mutation leads to dysfunction of the cells that release mucus and other fluids, such as \"airway\" cells, sweat glands, pancreatic cells, and intestine cells. Thus, it promotes several complications, such as respiratory infections or failure, intestinal obstructions, and, in some cases, glucose intolerances and diabetes. Thanks to the continuous development of treatments targeting airway clearance, antibiotics and the approval of VRTX's Trikafta, which is a highly effective CFTR modulator, the life expectancy of CF-patients born between 2018-2022 is predicted to be 56 years (see image below), according to the 2022 CF Patient Registry Data. CF survival rate by year (2022 CF Patient Registry) Although there is no doubt that Trikafta has been a game changer for CF patients, it is also true that the therapy is far from perfect, as it is only providing a temporary solution to the problem. Moreover, given that the deficiency of CFTR persists, CF patients now face other long-term complications associated with the long-term chronic disease, such as diabetes. In contrast, ARCT-032 aims to provide a gene-therapy solution to the problem by delivering a functional copy of the CFTR gene to the airway cells. ARCT-032 revenue potential ARCT-032 is an inhalable self-amplifying mRNA-based treatment delivered using lipid-nanoparticles. Given the nature of the therapy, which is in general terms similar to the Pfizer-BioNTech COVID-19 vaccine, I would expect this treatment to be effective only during a period of time, in other words, not a life-time treatment. Arcturus has not disclosed the specifics of its CF treatment, but based on the clinical trial regime, which includes ascending doses of ARCT-032 in healthy adults (to assess safety) and two doses of ARCT-032 administered to CF-patients via nebuliser, I would presume that their treatment is expected to be effective as a single shot with a potential booster. It remains to be seen whether the two doses will be identical or not, and the period of time in between doses. Moreover, even in the best-case scenario, I would expect this treatment to only target the airway cells, thus the complications associated with other organs are likely to remain. Trikafta costs nearly $28 000 per a supply of 56 granules, when paying in cash and using the Drugs.com - Prescription Drug Information discount card. While the cost, prior discounts per patient per year has been listed as high as $326 000. Vertex, in its Q42023 earnings call, reported $8.94 billion in total sales of Trikafta in 2023 alone. Given that ARCT-032, if successful, will be a gene therapy treatment, I would expect its price per unit to be substantially higher than drug-treatments such as Trikafta. However, the efficacy of the gene therapy should span a longer time frame than the equivalent drug treatments, hence reducing the amount of doses required per annum. In this sense, considering the projected annual price of other non-curative gene therapies such as Vyjuvek ($630 500), as well as Trikafta's annual cost, I would expect ARCT-032 to have an annual cost around $500 000 per patient, and to be able to generate at least similar annual revenues than Trikafta, $8.9 billion, at peak sales. Pipeline beyond ARCT-032 and COVID-vaccines Arcturus Therapeutics is currently developing a second gene therapy utilising its LUNAR lipid nanoparticles and self-amplifying mRNA, which targets OTCD. The treatment has been named ARCT-810 or LUNAR-OTC. OTCD is a rare genetic condition affecting the capacity of hepatic cells and small intestine cells to convert insoluble urea into soluble urea, which can be excreted via urine. OTCD's worldwide prevalence has been estimated to be around 1:50 000 to 1:100 000 births. OTCD is more prevalent in males than females, and the severe onset of the condition usually results in neonatal death. On the other hand, milder versions can be detected at any age. People with OTCD develop hyperammonemic coma, and/or neurological complications such as developmental delay, or severe cognitive impairment. Although females are usually considered carriers, they can also present metabolic impairments that may evolve into acute liver failure. LUNAR-OTC is currently in Phase 2 clinical trials. The treatment has already been granted orphan drug designation by FDA and the EMA for the treatment of OTCD, as well as fast track designation and rare pediatric disease designation, which will enable them to use an accelerated path to commercialization once the regulatory approval is obtained. Recently, the company delivered a presentation focused on LUNAR-OTC. In summary, the Phase 1 clinical trials have demonstrated that the single dose and multiple dose therapies were well tolerated by the healthy subjects. Interestingly, those clinical trials revealed a mRNA delivered had a terminal half life in the range of 52-62 hours, based on that data, the company considered a 2-week interval was required in the multiple dose regime. Currently, they are carrying out the Phase 2 clinical trial in Europe, in which they are testing LUNAR-OTC's efficacy on reducing the OTCD-related biomarkers in adults and adolescents with mild OTC. The company is expecting to share the results of this study by Q22024. Financial highlights based on Q42023 report Arcturus Therapeutics is currently trading at $25.98 per share, which accounts for a $699.26 million market cap. In March 2024, the company reported their Q42023 results. After looking into the company's consolidated statements, it is clear that ARCT is in financial distress, despite the good news in terms of research & development, regulatory approvals and collaboration revenues. In the following table, I summarized some of the figures extracted from ARCT's March 2024 10K: Arcturus Therapeutics Financial updates (Data collected by the Author from ARCT's Q42023 financial report) In summary, when comparing the operating expenses in 2023 vs. 2022, the company has decreased its total revenue and net income by $39 million, while increasing its YoY operating expenses by 31% (mostly due to the cost of R&D), and the EPS have returned to negative figures, from USD 0.35 in 2022 to -1.12 in 2023. On the plus side, ARCT managed to reduce its liabilities by 16%. Hence, it would be easy to agree with me that 2023 was, in fact, a financial disaster for ARCT. However, biotech and pharmaceutical companies in developmental and clinical stages often suffer this kind of financial distress until eventually, they succeed in commercializing some therapy, get acquired by some other larger company or file for bankruptcy. Currently, the management has stated, in its latest earnings call, that they have extended the: Cash runway through the first quarter of 2027 based on the current pipeline and research programs. In this sense, ARCT's management team, in the Q42023 10K report, stated: During fiscal year 2023, we received milestone payments totaling $147.9 million from CSL Seqirus. Additionally, we received milestone payments of $23.8 million from CSL Seqirus subsequent to December 31, 2023. We expect to receive future payments from CSL Seqirus primarily by meeting future milestones related to the CSL Collaboration Agreement. At December 31, 2023, the Company's balance of cash and cash equivalents, including restricted cash, was $348.9 million. In addition, given the maturity of ARCT's cystic fibrosis program (ARCT-032), and the OTCD program (LUNAR-OTC), both expected to deliver key results in Q22024, makes me believe that the company has the potential to become profitable prior the end of its financial runway. Valuation At this moment in time the Wall Street consensus rates ARCT as \"Buy\", with an average 155% upside. Likewise, Seeking Alpha's Quant also gives a \"Buy\" to the stock. Given that Arcturus lacks financial stability and inherent risks on a potential speculative buy, I have utilized a 30% discount rate when calculating the intrinsic value of ARCT. In the base case scenario, I have estimated the company will be able to report a 10% average growth in the next 5 years, considering its collaboration revenues from the vaccines business, and an average 30% 10 y growth considering they have a mild success in the commercialization of ARCT-032 and LUNAR-OTC. Thus, the base-case scenario target share price is $49.14 (89.14% undervalued). On the other hand, when calculating the bullish case, I estimated that ARCT-032 will be able to take part of VRTX's CF market share and LUNAR-OTC will also be a commercial success in the next 5 years, thus averaging 20% revenue growth. While observing an average of 30% growth in the next 10 years. Hence, the target share price in the bullish case is $71.32 (174.5% undervalued). For the bearish case, I estimated the commercialisation of ARCT-032 and ARCT-810 will be delayed due to unforeseen results in the clinical trials, thus accounting for a 5% growth in the next 5 years, and a modest 15% average revenue growth for the next 10 years, given the fierce competition against VRTX and others. Therefore, the target share price is $31.38 (20.78% undervalued). Finally, my intrinsic value for ARCT is $52.24 (101% undervalued), supporting my \"buy\" rating (see image below). Arcturus Therapeutics Intrinsic Value (5 years price chart taken from Google Finance, price projections by the Author) Risks Arcturus Therapeutics is a biotechnology company in the clinical stage, focused on the development of mRNA-based therapies for the treatment of infectious, respiratory and liver diseases. The company is expecting to receive milestones payments and sales royalties from CSL Seqirus associated with the commercialization of their COVID-19 vaccines and Flu vaccines. However, it is not a secret that the COVID-19 vaccine market is in decline; therefore, I would not foresee this vaccine arm of the business to be profitable long term. On the other hand, ARCT-032 has the potential to be a blockbuster therapy, given the success that other companies, such as VRTX, have had with their Trikafta. However, the profitability potential of cystic fibrosis is exactly one of the largest risks for Arcturus in this area. Indeed, VRTX is also carrying out clinical trials for its mRNA-based treatment against cystic fibrosis (VX-522), and they are expecting to release results by the end of 2024 or early 2025. Thus, ARCT is slightly ahead in the game at the moment, but not by much. Finally, one of the largest risks is, of course, that the company's profitability depends on the success of ARCT-032 and LUNAR-OTC in their clinical trials, together with the success of commercializing their products. If the clinical trials report mixed results in terms of efficacy of the treatments, ARCT will face delays in the development of its therapeutic candidates that may exceed its financial runway (Q12027). Final Remarks In conclusion, I consider Arcturus Therapeutics is currently in the position to deliver the next breakthrough in the treatment of cystic fibrosis. However, its success will depend on the efficacy and safety results from the ongoing clinical trial. If/when the therapy is approved, ARCT may be able to start the commercialisation of their self-amplifying inhalable treatment before VRTX, which should enable them to perceive large amounts of cash in sales revenue. On the other hand, given that ARCT owns IPs protecting both the carrier (LUNAR lipid-nanoparticles) and the therapeutic self-amplifying mRNAs, I consider that ARCT has a valuable know-how that is valuable beyond ARCT-032 and LUNAR-OTC. However, so far, the company has not demonstrated the efficacy of their treatments in humans. In addition, ARCT's financial distress places them in risk of bankruptcy if their research programs fail or face substantial delays.  Should investors consider buying this stock, they should expect high volatility in the share price in the near future. 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