We believe we are still in the early innings of an under-followed biotech that could become a major story for 2014-15. Arrowhead is one of our top small-cap ideas and believe it is going higher with upcoming HBV data in Q3:14. This stock is attractive in our view as: 1) lead drug for Hep B looks promising – if it provides a ‘functional cure’ by knocking down HBsAg as designed, it could be a multi-billion dollar opportunity with 300M+ HBV patients worldwide, and 2) its RNAi platform technology that will bring on 1-2 more drugs shortly is similar to Alnylam ( ALNY) and [Isis Pharmaceuticals ( ISIS)] (and could lead to many drugs in uber-bull case), and valuation for peers is 3-5x higher from here. This implies multiples of upside to current valuation even if just one drug has promise, and we think it will begin this year. We also think Arrowhead is a reasonable partnership candidate for Roche ( RHHBY), Bristol-Myers Squibb ( BMY), Merck ( MRK), Novartis ( NVS), and other antiviral players. Our $35 PT assumes 25% probability of success where 50% success implies upside to $67.

Arrowhead is an early stage platform company that we believe could have the market cap potential of $4-5B as it becomes de-risked. The company’s lead target is ARC-520 for Hepatitis B (HBV). Our HBV deep dive suggests ARC-520 could grow the market from $2B to $5B and see $5.2B peak sales WW. Ph2a data in 4Q14, and ph2b data in 2015 provide significant upside & the oppy to de-risk the platform over the next 12-18 mos. We also think HBV & HCV markets have strong parallels.