When Pasadena-based Arrowhead Pharmaceuticals Inc. signed a huge licensing and collaboration deal with Cambridge, Massachusetts-based Sarepta Therapeutics Inc. just before Thanksgiving last year, it seemed like a major lifeline for the company in its long quest to bring to market drugs from its platform that combat diseases by silencing the genes that cause them.

The deal involved Sarepta paying Arrowhead $500 million in cash up front with another $250 million in $50 million increments over five years and the potential for hundreds of millions of dollars in future milestone payment. Arrowhead’s investors also received $325 million worth of Sarepta shares up front.

In exchange, Sarepta, which specializes in therapies for rare diseases such as muscular dystrophy, gained entry to what it saw as a promising market for Arrowhead’s early-stage drugs to treat rare diseases. The deal opened up four of Arrowhead’s drugs that were in early clinical trial phases to collaborative development with Sarepta, as well as three more Arrowhead drugs in pre-clinical development.

Arrowhead investors were understandably pleased with the deal and sent company shares up 12% the day it was announced. After all, the deal meant more than $1 billion in guaranteed cash and stock for Arrowhead within five years. Licensing deals like this are how companies with drugs in early and middle stages of development get the money necessary to go through expensive clinical trials and wait out the years before their drugs can get approved to go to market.

Sarepta woes cause concern

In the past two weeks, Arrowhead investors have learned about the perils of such deals.

Turns out Sarepta was having major problems with one of its own drugs – not part of the deal with Arrowhead – to treat Duchenne Muscular Dystrophy, a muscle-wasting disease primarily impacting boys. Earlier this year, two non-ambulatory boys being treated with the drug died, prompting an immediate halt to the drug for use in that specific population. After months of investigations and negotiations, Sarepta reached a deal with the U.S. Food and Drug Administration to place warnings on its label for the drug, called Elevidys.

Then on July 16, Sarepta announced a restructuring that included laying off about one-third of its workforce. This piece of news wasn’t all bad for Arrowhead investors, though, as Sarepta announced a pivot toward the types of drugs involved in the collaboration with Arrowhead and away from gene therapy treatments.

But two days later, on July 18, came devastating news of the death of a third patient who had been taking Sarepta’s Elevidys drug. The FDA immediately demanded that Sarepta halt all shipments of the drug and ordered holds on clinical trials for several Sarepta drug candidates to treat another form of muscular dystrophy. Sarepta initially defied the FDA demand, but a few days later reversed course and complied.

When the markets opened on July 21, Arrowhead stock plunged 22% on the news from its partner Sarepta.

Once Arrowhead investors realized that the drugs in question were not the ones involved in the collaboration deal, the stock recovered about half the lost ground later in that trading session. But there was still concern about the financial viability of Sarepta and how that would impact the collaboration and future Sarepta payments to Arrowhead.

Arrowhead tries to reassure investors

That concern prompted Arrowhead to issue an expansive statement on July 23.

“Arrowhead continues to conduct clinical and non-clinical studies as stipulated in the agreement, and it expects Sarepta to continue to meet its required financial obligations,” the statement read. “Sarepta has provided no indication of any intention to fail to fulfill any of its obligations, however if that occurs there are clear termination provisions that would cause assets and associated intellectual property to be returned to Arrowhead. In such cases, Arrowhead would have no obligation to return any consideration Sarepta had already paid.”

The statement went into specifics, saying that for each payment or type of payment due from Sarepta, if the payment is not made, Arrowhead can terminate the entire deal.

Arrowhead’s statement had its intended effect: on July 23, Arrowhead’s share price rose 6.5% to $15.92. The stock rose another 2% on July 24 to close at $16.26, only 50 cents below its July 18 close at $16.76.

But the stock was still below the $18.61 level on July 14, before the current situation at Sarepta unfolded.