Arrowhead Pharmaceuticals Inc (NASDAQ:ARWR) just shocked markets with the announcement that it would be discontinuing its lead development programs. The company held a conference call at market close on Tuesday to address the decision, and we sat in on the call in an attempt to gain some clarity.

Here’s what we found out.

Before we get in to the call itself, here’s a bit of background. Arrowhead has been developing a suite of products targeting hepatitis B, and certain other liver related issues, based on a delivery vehicle called EX1. Back at the beginning of November, the company announced that the FDA had put the programs that used EX1 on hold, based on some non-clinical (primate) data. Essentially, a number of primates had died, having received a high dose of the drugs in question. The dose is higher than the maximum dose that would be offered to humans, and so there was no immediate concern for the patients in the clinical trials, but given these drugs’ potential for long term actors, and the potential toxicity buildup that may be associated with this sort of use, the agency decided it best to stop dosing and look in to the matter.

From its communication with shareholders, while frustrated, it seemed that management agreed. For reference, the drugs in question are ARC-520, ARC-521, and ARC-AAT.

So, bringing things up to current day, Arrowhead has decided to discontinue the development of these drugs, and pivot to an alternative element of its pipeline called SubQ. This side of the pipeline is less developed, and based on data available (although we’ll mention this again shortly) not as advanced as the discontinued assets.

It’s worth noting that the management side of the call was pretty clear, but not overly insightful. The rhetoric was almost certainly prepared in advance, and outside of a few key points, didn’t really reveal too much above and beyond that which we learnt from the press releases.

That said, there are some things worth mentioning.

The company has been in discussions with regulatory entities and experts in the HBV field across the last three weeks, and while there still doesn’t seem to be any clarity on exactly what caused the deaths, management believes it was something to do with the dose related toxicity, but exacerbated by study-related handling procedures and infusion reactions. Humans are pretreated for these things (the primates weren’t), so at lower doses it’s unlikely there would be any issue, but that’s not the point. The point is that Arrowhead would need to prove that there isn’t any issue if it going to continue on this development pathway, and as usual, it all comes down to one thing – capital.

In order to conduct the non clinical studies necessary to prove the drug’s tolerability, Arrowhead estimates it would need a minimum nine-month study. The company also estimates that the preparation, outside company hiring, data analysis and other elements of the study would take a further nine months (on aggregate) to complete, adding a potential minimum eighteen months on to the development timeline for these drugs. And here’s the key point – even after the completion, the likelihood of regulatory agencies being completely satisfied with the data is slim.

Based on the risk inferred by this later point, Arrowhead has decided to stop throwing money at the EX1 programs, unload one third if its staff, and advance the above mentioned SubQ programs.

For us, and we’re sure we’re not the only ones (Arrowhead included) this seems a shame. The assets looked extremely promising, and were some of the closest in the space to a cure. However, because of the capital risk associated with extending time to filing, they are being left behind. If money wasn’t an issue, and that’s a big if, we know, these drugs would be continued and we may have a cure for Hep B before 2020.

As it stands, this isn’t going to be the case.

The fresh focus is potentially rewarding, and the company aims to get back in to the clinic after a short hiatus, but we don’t expect a full recovery in market cap before late 2017.

As for the dropped assets – are there any good hearted billionaires out their that want to take a punt on something that Arrowhead felt it wasn’t able to force its shareholders to get behind?