Arrowhead Pharmaceuticals, Inc. — FY2018 Form 10-K
Business context and reporting period. Arrowhead is a clinical-stage biotechnology company developing RNA interference (RNAi) medicines using its Targeted RNAi Molecule (TRiM) platform. This annual report covers the fiscal year ended September 30, 2018; it is not a standalone calendar fourth-quarter report. The company had no approved products and relied primarily on collaboration revenue and equity financing.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $16.1 million | $31.4 million |
| Research and development expense | $53.0 million | $50.9 million |
| General and administrative expense | $19.1 million | $17.5 million |
| Operating loss | $55.9 million | $37.0 million |
| Net loss | $54.5 million | $34.4 million |
| Basic and diluted loss per share | $0.65 | $0.47 |
| Cash from operating activities | $(47.2) million | $(23.9) million |
Revenue fell about 49%, primarily because most of Amgen’s $30 million ARO-LPA upfront payment had been recognized in FY2017. FY2018 revenue included a $10 million Amgen milestone earned after dosing began in an AMG 890 Phase 1 study; the company recognized it in full because its related performance obligations were substantially completed. No product-sales revenue or meaningful product gross margin is reported.
Operating expenses increased about 5%, with higher R&D spending as ARO-AAT and ARO-HBV advanced into clinical studies. Net loss widened as lower collaboration revenue more than offset the modest rise in expenses. FY2018 operating cash use increased from FY2017; cash used for R&D and G&A was partly offset by the Amgen milestone.
At September 30, 2018, Arrowhead had $30.1 million of cash and cash equivalents and $46.4 million of short-term investments, or $76.5 million combined, versus $65.6 million a year earlier. Total assets were $111.6 million. Current assets were $78.8 million and current liabilities $12.4 million. The balance sheet reported $2.3 million of note payable, related to Madison facility improvements; the company repaid it in October 2018. FY2018 financing cash flow was $60.0 million, chiefly from the January public offering, which generated $56.6 million net proceeds. Management said resources at year-end were expected to fund operations for at least 12 months.
Contractual commitments included $27.5 million of purchase obligations, of which about $20.1 million was expected in FY2019, and $9.3 million of operating lease payments. The filing reported no off-balance-sheet arrangements. The company reported recurring net losses and no history of profitability.
Material developments and outlook
- Pipeline: ARO-AAT completed dosing in a Phase 1 study; Arrowhead planned a Phase 2 study in 2019. ARO-HBV was in a Phase 1/2 study. ARO-ANG3’s CTA was filed in October 2018, with a Phase 1 start planned for 2019, subject to approval. CTA filings were planned for ARO-APOC3 in late 2018 and ARO-ENaC and ARO-HIF2 in 2019.
- Early clinical findings: November 2018 ARO-AAT results reported greater than 90% average serum AAT reductions at certain doses, with response lasting several weeks; reported adverse events included upper respiratory infections and headache. ARO-HBV results reported a mean HBsAg nadir reduction of 1.9 log10 in the described patient group. These early findings do not establish clinical benefit, long-term safety, or regulatory success.
- Janssen agreement, subsequent to year-end: In October 2018, Arrowhead licensed ARO-HBV to Janssen, which will assume development and commercialization after Arrowhead’s ongoing Phase 1/2 study. Janssen also may select up to three additional targets for Arrowhead-funded-by-Janssen discovery and preclinical work. Arrowhead reported a $175 million upfront payment and a separate $75 million equity investment received after year-end. Potential milestone payments—up to approximately $1.6 billion for ARO-HBV and $1.9 billion for additional targets—and royalties are contingent, not assured revenue.
- Amgen: Amgen had worldwide rights to ARO-LPA and an option relating to ARO-AMG1. Arrowhead reported $35 million of upfront payments and a $21.5 million equity investment under the agreements, with up to $617 million of potential option and milestone payments and potential royalties.
- Spending outlook: Management expected R&D expenses to rise as more candidates progressed toward clinical trials. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies, and other notable items
- All programs remain subject to clinical, regulatory, manufacturing, reimbursement, and commercial risks; Arrowhead cautioned that early-stage results may not predict later outcomes and that it may never develop marketable products or achieve profitability.
- Development depends on partners for some programs and on third parties for clinical trial services and drug manufacturing. Partner decisions and program progress affect potential milestone and royalty receipts.
- Two sets of securities and derivative litigation were described. One earlier class action was dismissed and affirmed on appeal; a separate consolidated class action dismissal was on appeal, with related derivative actions stayed. The company recorded no liability for these matters; it said the impact of the later case could not be estimated.
- The filing describes risks including intellectual-property disputes, reliance on licensed patents, clinical delays, financing needs, dilution, and healthcare price and reimbursement pressures. The company completed a $56.6 million net-proceeds equity offering during FY2018 and issued additional shares in the subsequent Janssen-related investment.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed those controls as effective at September 30, 2018.
Important facts for investors to verify
- Review the full clinical datasets, cohort sizes, follow-up, safety findings, and trial designs behind the ARO-AAT and ARO-HBV results; confirm subsequent trial starts and regulatory status.
- Confirm receipt and accounting for the post-year-end Janssen upfront and equity proceeds, and distinguish them from the September 30, 2018 cash and investment balance. Assess cash burn and runway as clinical spending grows.
- Track actual partner progress and any achieved milestones, options, or royalties; headline maximum payments are contingent and may never be received.
- Review the status and potential financial effects of the pending litigation, purchase commitments, leases, and other contractual obligations.
- Monitor share-count changes and potential dilution from equity financing, stock awards, and partner investments.