Arrowhead Pharmaceuticals, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020. Unaudited consolidated results; amounts below are in U.S. dollars. Arrowhead develops RNA interference therapeutics, with both internal pipeline programs and partnered candidates.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $21.3 million | $29.5 million | Down $8.2 million (about 28%) |
| Research and development expense | $36.6 million | $23.4 million | Up $13.2 million (56%) |
| General and administrative expense | $8.8 million | $10.9 million | Down $2.1 million (19%) |
| Operating loss | $24.1 million | $4.9 million | Loss widened |
| Net loss | $20.7 million | $2.7 million | Loss widened |
| Diluted loss per share | $0.20 | $0.03 | Loss per share increased |
| Operating cash used | $38.9 million | $23.5 million | Use increased |
Revenue primarily reflected recognition of Janssen collaboration consideration: $12.7 million versus $28.8 million in the prior-year quarter, as performance progress and related revenue recognition differed between periods. Takeda collaboration revenue contributed $8.2 million in the current quarter. The filing does not present a gross margin; operating loss was approximately 113% of revenue.
Balance sheet, liquidity and cash flow
- At December 31, 2020, cash and cash equivalents were $139.9 million; marketable securities were $86.0 million; short-term investments were $79.4 million; and long-term investments were $110.9 million. Combined cash and investment resources were approximately $416.2 million, down $36.8 million from September 30, 2020.
- Total assets were $499.3 million, stockholders’ equity was $454.5 million, and current liabilities were $25.1 million. Current assets were $323.7 million.
- Debt is not reported. Lease liabilities totaled $20.9 million, including $1.2 million current and $19.7 million long-term.
- Operating activities used $38.9 million; investing activities provided $30.2 million, mainly from securities sales, partly offset by $4.3 million of property and equipment purchases; financing activities provided $5.1 million from stock option exercises. Cash and cash equivalents fell $3.7 million during the quarter.
- Management stated that available financial resources and the operating plan were expected to fund operations for at least the next 12 months. The company had an ATM agreement allowing up to $250 million of share sales, with no shares issued under it by December 31, 2020.
Material changes and business developments
- R&D expense increased 56%, driven by expanded R&D headcount, greater candidate and clinical-trial costs, discovery activity and stock-based compensation. Management expects R&D and related costs to increase as programs advance.
- G&A expense declined 19%, primarily because the prior-year period included higher performance bonuses and headquarters moving costs.
- Arrowhead reported positive interim Phase 2 ARO-AAT data and positive clinical data for ARO-APOC3 and ARO-ANG3. Janssen began dosing in its Phase 2b REEF-1 chronic hepatitis B study, triggering a $25 million milestone.
- Under the Takeda agreement for ARO-AAT, the parties will co-develop the program; U.S. commercialization, if approved, provides for 50/50 profit sharing, while Takeda leads commercialization outside the U.S. with Arrowhead eligible for 20%–25% tiered royalties. Arrowhead received the $300 million upfront payment in January 2021, after quarter-end, and may receive up to $740 million in additional milestones.
Outlook, risks and contingencies
- No specific revenue, earnings or clinical-program guidance was provided. Management expects research and clinical costs to rise as its pipeline grows and advances.
- COVID-19 had no significant financial impact in the quarter, according to the company. ARO-AAT study enrollment, paused during fiscal 2020, resumed screening and enrollment; earlier-stage programs experienced delays. Future effects remain uncertain, including possible impacts on trial enrollment, suppliers and employees.
- Future purchase commitments were estimated at $100.2 million, of which approximately $85.0 million was expected in the remainder of fiscal 2021. Licensed-technology milestones could reach mid- to upper-double-digit millions of dollars; no such milestones were reached in the quarter.
- The company reported no recorded contingent liabilities at December 31, 2020 and no material change to the risk factors in its latest Form 10-K. It cautioned that clinical development, collaboration execution, funding needs and the pandemic create uncertainty.
Important facts for investors to verify
- Confirm receipt and accounting treatment of Takeda’s $300 million upfront payment after quarter-end, including its effect on subsequent liquidity and revenue recognition.
- Track Janssen revenue recognition and deferred revenue, as the $252.6 million transaction price is recognized over performance of the associated obligations.
- Monitor R&D spending, operating cash burn, clinical-trial progress and whether management’s stated 12-month liquidity expectation remains valid.
- Review the $100.2 million purchase commitments, planned facility expansion costs and potential funding or dilution from the unused $250 million ATM facility.
- Assess clinical data and trial execution for ARO-AAT, ARO-APOC3, ARO-ANG3 and partnered programs, alongside COVID-19-related enrollment and supply risks.