Lay all the blame for Arrowhead Research's (ARWR)  spectacular hepatitis B implosion today at the feet of CEO Chris Anzalone and the rest of the company's management team. 

All CEOs of publicly traded companies must manage investor expectations. For CEOs of early, development-stage biotech companies like Arrowhead, making sure Wall Street isn't delivered a nasty surprise is absolutely crucial. Credibility lost is very difficult to retrieve. Yet for some inexplicable reason, Anzalone totally botched the job.

For months, Anzalone and his team knew ARC-520 dosed at 1 mg/kg and 2 mg/kg yielded 0.2-log and 0.3-log reductions in hepatitis B viral load. Publicly and privately, however, Arrowhead executives led investors to believe that ARC-520 was more potent, achieving viral load reductions in the range of 0.7 log or higher. 

Arrowhead could have been honest with investors about ARC-520's mediocre performance at the two lowest doses. The company could have told investors, "We're not where we want to be with ARC-520 dosing and viral load reductions yet, but we think we can get there soon at higher doses and here's why."

If Arrowhead had played fair and conservatively earlier this year, perhaps the stock price might not have reached $26 in March like it did. Maybe the company's valuation bump would have been more modest. But I'm also more certain Arrowhead wouldn't trade at a year low like it is now because investors were misled and are now pissed off. 

I asked Arrowhead management to explain their actions but received no response.

One more thought on this subject. I wrote the following in August after Arrowhead first announced top-line results from the ARC-520 study:

First thing you should notice is the lack of specific numbers. Arrowhead executives, on a conference call, said the study is still blinded. If the study is blinded, how can Arrowhead report results differentiated between patients dosed with ARC-520 and those on a placebo? Arrowhead says educated guesses are being made based on the blinded responses. Yes, it's a bit unusual, even weird, although I assume Arrowhead assumes hepatitis B patients treated with a placebo would show little or no response at all, making it easy to identify responses to the drug.

Knowing what we know now, is it possible the educated guesses Arrowhead made about the blinded patient data were wrong? This in no way excuses Arrowhead's incompetence because between that August day and today, the company did eventually get the unblinded data and could have then given investors a more truthful picture of ARC-520's activity. But for investors, the Arrowhead blow up is a reminder to be very wary of any company making assumptions about clinical trial results based on blinded data. 

Institutional investor and biotech Twitter tribe member @Zbiotech (follow him!) summed it up best earlier today:


Looking ahead, Arrowhead is testing higher doses of ARC-520 in hepatitis B patients. The company hopes to see better results. But after today's epic loss of credibility, how many investors will believe the company or care?

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.