Unlocking Arcturus' Potential And De-Risking Through Partnerships

Arcturus (NASDAQ:ARCT) is a biotechnology company specializing in mRNA vaccines and delivery systems. The company is progressing in multiple research areas, including treatments for Ornithine Transcarbamylase deficiency and cystic fibrosis. Their inhaled mRNA candidate, ARCT-032, has shown promising preclinical results for cystic fibrosis treatment. The company's self-amplifying mRNA vaccine platform enables quick and cost-effective scale-up, which is beneficial during pandemics and for remote or underdeveloped areas.

As I wrote in a previous article, through recent deals, they've managed to extend their financial runway close to four years. The company is attempting to minimize financial risk through profit-sharing and royalty agreements, and their revenue comes mainly from collaborations, technology transfer fees, and license fees. While Arcturus' income statement has the look of a startup in the investment phase, there are some indicators that suggest growth potential, such as costs decreasing compared to revenue and the presence of ongoing partnerships. Arcturus has recently released its 2022 10-K, which presents an opportunity to take a closer look at the company's current status.

De-risking through partnerships

The company has moved in the direction of de-risking its financial position through partnerships, such as with CSL and Meiji. By capitalizing on their innovative STAR mRNA vaccine and LUNAR delivery platform technologies, Arcturus has managed to draw in partners and secure funding to push their pipeline programs forward. These collaborations have had a noticeable impact on the company's bottom line and balance sheet, supplying the resources required for continued research and development. Let's delve a bit deeper into these partnerships.

CSL partnership

The strategic collaboration between Arcturus and CSL, announced just four months ago, aims to develop and commercialize next-generation mRNA vaccines targeting COVID-19, Influenza, and three additional pathogens, as well as focusing on pandemic preparedness. The partnership combines CSL's extensive commercial and manufacturing infrastructure with Arcturus' mRNA manufacturing expertise and their innovative STAR mRNA vaccine and LUNAR delivery platform technologies.

Arcturus took in a sizeable $200 million payment during the last quarter of 2022, which played a significant role in shaping the company's financial position. This wasn't an isolated event; come March 2023, Arcturus hit developmental milestones, leading to a $90 million bill sent to CSL. Their teamwork revolves around a 40-60 profit-sharing scheme tied to the COVID-19 vaccine offering, where Arcturus secures 40% and CSL takes 60%. As the pipeline projects progress, Arcturus has the opportunity to qualify for more developmental and commercial milestones.

Meiji partnership

Following the noteworthy CSL agreement, the company has not been idle in its pursuit of mitigating risks through strategic alliances. Subsequently, a partnership with Meiji was forged. The crux of this collaboration is the advancement of ARCT-154, a cutting-edge self-amplifying mRNA booster vaccine for COVID-19. Japan has demonstrated a proactive approach in administering COVID booster vaccinations, and the government is keen on achieving self-reliance in mRNA vaccine development. Meiji plays a pivotal role in this endeavor. In the fourth quarter of 2022, the Japanese government granted Meiji a significant subsidy to facilitate this initiative, making Meiji accountable for all development expenses pertaining to ARCT-154 within Japan.

Arcturus pipeline

Arcturus is not limited to its partnerships with CSL and Meiji, and it also has other products in the pipeline.

ARCT-810 is a treatment being developed to address the challenges faced by individuals with ornithine transcarbamylase (OTC) deficiency. The therapy utilizes the LUNAR delivery technology, which is known for its safety due to the rapid breakdown of lipids used in the process. This investigational treatment is currently being studied in two separate clinical trials: i) A Phase 1b study, involving adult participants; ii) A Phase 2 study, focused on adolescents and adults with OTC deficiency.

The Phase 2 study is an extension of a previous Phase 1 study, which showcased a positive safety profile. This ongoing study aims to include up to 24 adolescents and adults with OTC deficiency, split into two dosage groups. As of now, several participants have been enrolled, and the plan is to release interim clinical data from this Phase 2 study later in the year.

ARCT-032 is a potential treatment for cystic fibrosis. This inhaled mRNA therapy aims to produce a fully functional CFTR protein in the lungs of those affected by the disease. The Cystic Fibrosis Foundation has shown its support for the program, and the preclinical data so far has been promising. The therapy has successfully been delivered to the lungs in four different animal species, and lab tests on bronchial epithelial cells from CF donors have demonstrated robust expression of the CFTR protein and restoration of chloride current.

At present, ARCT-032 is being tested in a Phase 1 clinical trial in New Zealand, with participants receiving one of four possible dosages. Enrollment for the first two cohorts has been completed, and the entire study, which involves 32 subjects, is expected to finish enrollment by the second quarter of the year. The results of the study are slated to be released later in the year.

Reinforcing the management team

Dr. Juergen Froehlich and Dr. Igor Smirnoff were hired to strengthen the company's management team. Dr. Froehlich has been appointed as Chief Medical Officer, and Dr. Smirnoff as Chief Development Officer. It is important to give credit to these hirings because they are a concrete step towards an improved management team with more ability to execute.

Dr. Froehlich's background in rare diseases, such as OTC deficiency and cystic fibrosis, makes him a fitting candidate to steer the mRNA therapeutics pipeline. His track record of accomplishments includes obtaining international marketing approvals for numerous drugs. His proficiency in cystic fibrosis treatments, including the authorization of KALYDECO and clinical development planning for additional CFTR modulators, constitutes a substantial advantage for the company.

Dr. Igor Smolenov, meanwhile, has assumed the role of Chief Development Officer of Vaccines. In this capacity, he will oversee the progression of the company's COVID and seasonal flu self-amplifying mRNA vaccine initiatives in collaboration with CSL. Dr. Smolenov boasts a remarkable history in clinical development, having played a part in the prosperous development and licensing of several groundbreaking vaccines.

Prior to his current role, Dr. Smolenov held positions at Clover Pharmaceuticals, CSL Seqirus, Moderna, and Novartis Vaccines, where he was instrumental in the development and worldwide licensing of multiple vaccines. Possessing an MD, PhD, and Doctor of Science degrees from Volgograd State Medical University in Russia, as well as authoring over 50 articles in peer-reviewed journals, Dr. Smolenov's vast experience renders him a beneficial asset to the company in his capacity as the Chief Development Officer supervising the vaccine division.

Valuation and risks

Examining the company's balance sheet, one can observe a slight decline in the current ratio, shifting from 3.8 to 3.18. This change can be primarily attributed to the repayment of long-term debt. Excluding this factor, the company would have strengthened its position, thanks to a positive operating cash flow.

The cost structure remained controlled, with operating expenses (OPEX) decreasing from $215 million to $194 million. The substantial boost came from collaboration revenue with CSL, which enabled the company to generate a positive cash flow of nearly $31 million.

While 2022 proved to be an exceptional year for the company, showcasing notable accomplishments, the reality is that a significant portion of their revenue is non-recurring. Consequently, it is uncertain whether cash burn will reemerge in 2023. Without the CSL payment, the company would have experienced a $169 million cash burn, leaving them with enough cash for close to two years under those conditions. If we add the fact that a lot of the future results are dependent on the results of ongoing research, we conclude that this is the opposite of a riskless situation.

That said, we are aware that the company has already accumulated $90 million from the CSL deal up until March 2023, which provides some assurance that the momentum may be sustained.

We are currently revising our Bull and Bear scenarios for the company. In the Bull scenario, the company could achieve an average revenue of $200 million by 2025. Assuming a 3% annual increase in dilution, the revenue per share would be $6.76. Applying a 10x revenue multiple yields a price target of $67.60. In contrast, if revenue averages only $60 million by 2025 with the same dilution, the revenue per share would be $1.81. Using a lower revenue multiple of 6, the price target would be $10.8. With the current price of $24.94, the annualized return for the Bull scenario is 39% and for the Bear scenario, -24%. These figures align with our previous assessments, and we continue to hold a positive outlook on Arcturus, as the CSL deal has reinforced our thesis surrounding the stock.