Arrowhead Pharmaceuticals, Inc. — FY2020 Form 10-K
Business and reporting period. Arrowhead develops RNA interference (RNAi) medicines. This annual report covers the fiscal year ended September 30, 2020; the fourth-quarter figures below are unaudited. The company had no approved commercial products, and revenue primarily came from licensing and collaboration arrangements.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $88.0 million | $168.8 million |
| Research and development expense | $128.9 million | $81.0 million |
| General and administrative expense | $52.3 million | $26.6 million |
| Operating income (loss) | ($93.2 million) | $61.2 million |
| Net income (loss) | ($84.6 million) | $68.0 million |
| Diluted earnings (loss) per share | ($0.84) | $0.69 |
| Operating cash flow | ($95.4 million) | $173.0 million |
Revenue fell 47.9% year over year, primarily because less revenue was recognized from the Janssen arrangement as Arrowhead progressed toward completing its related performance obligation. The company reported an operating margin of approximately negative 105.9% and a net margin of approximately negative 96.1%, calculated from reported revenue and losses.
R&D expense rose 59%, reflecting pipeline expansion, clinical-trial and manufacturing costs, discovery work, hiring and increased stock compensation. G&A expense rose 97%, including higher stock-based compensation. Stock-based compensation totaled $43.4 million for the year.
FY2020 Q4: Revenue was $7.6 million, operating loss was $50.1 million and net loss was $48.4 million, compared with revenue of $43.3 million and net income of $11.7 million in FY2019 Q4.
At year-end, Arrowhead had $143.6 million in cash and cash equivalents, $85.0 million in marketable securities, $86.9 million in short-term investments and $137.5 million in long-term investments. Current assets were $322.4 million and current liabilities were $40.7 million. The balance sheet reported no long-term debt; it included $20.0 million of long-term lease liabilities. Operating leases and purchase commitments totaled $110.3 million, including $78.0 million of purchase commitments, of which $60.2 million was expected within one year.
Financing activities provided $257.9 million, mainly from the December 2019 public offering, which generated $250.5 million net proceeds. Investing activities used $240.8 million, largely for purchases of investments and property and equipment. Management said existing cash and investments were sufficient to fund operations for at least the next 12 months.
Material changes and business developments
- Revenue shifted from $168.8 million of revenue and net income in FY2019 to $88.0 million of revenue and a net loss in FY2020, as collaboration revenue recognition declined while operating costs increased.
- Arrowhead expanded its wholly owned pipeline: ARO-HSD and ARO-ENaC entered Phase 1/2 studies, ARO-HIF2 entered a Phase 1b study, and ARO-APOC3 and ARO-ANG3 remained in Phase 1/2 studies. ARO-LUNG2 was being advanced toward clinical testing; ARO-COV was under development.
- Amgen initiated a Phase 2 study of Olpasiran (ARO-LPA) in July 2020, triggering a $20 million milestone. Amgen had declined its option on ARO-AMG1 in 2019.
- In October 2020, after year-end, Arrowhead signed a Takeda agreement for ARO-AAT. It provides a $300 million upfront payment, up to $740 million in potential milestones, 50/50 U.S. profit sharing if approved, and 20%–25% tiered royalties on ex-U.S. net sales. The upfront payment was expected in FY2021 Q1 and was not included in FY2020 year-end cash.
- Arrowhead sold 4.6 million shares in the December 2019 offering. It also had an at-the-market facility of up to $250 million, with no shares sold under it as of September 30, 2020.
Outlook, risks and other notable items
- No specific revenue or earnings guidance was provided. Management expected R&D spending to continue rising as candidates advanced and the pipeline grew.
- COVID-19 temporarily paused enrollment in the two ARO-AAT studies; screening and enrollment resumed during FY2020. The company reported no significant FY2020 financial impact but cautioned that future effects on trial enrollment, suppliers, employees and timelines remained uncertain.
- Key risks include clinical and regulatory failure, trial delays and enrollment challenges, reliance on partners and contract manufacturers, intellectual-property disputes, reimbursement and pricing pressures, and the need for future capital. The company had incurred net losses over its history and expected continued losses.
- Revenue from the Janssen license and services was recognized over time using estimated labor-hour progress. The auditor identified revenue recognition and contract-cost estimates as a critical audit matter. These estimates require judgment and could affect reported revenue.
- There were no contingent liabilities recorded at year-end. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also assessed internal controls as effective.
Important facts for investors to verify
- Progress, safety and efficacy results from Arrowhead’s clinical programs, particularly ARO-AAT and the cardiometabolic candidates; distinguish preliminary data from final trial results.
- Receipt and accounting of Takeda’s $300 million upfront payment, and the scope and timing of Arrowhead’s ARO-AAT co-funding obligations.
- Operating cash burn and liquidity runway as R&D costs and clinical commitments increase; assess the $78.0 million of purchase commitments and potential use of the ATM facility.
- Janssen’s and Amgen’s development progress and the conditions required for future milestones and royalties, which are not guaranteed.
- Assumptions underlying collaboration revenue recognition, deferred revenue and estimated costs to complete performance obligations.