Arrowhead Pharmaceuticals, Inc. — Q1 FY2018 Form 10-Q
Business context and period: Arrowhead develops RNA interference (RNAi) medicines. This unaudited quarterly report covers the three months ended December 31, 2017; comparisons are with the three months ended December 31, 2016. The company’s pipeline includes candidates for hepatitis B, alpha-1 antitrypsin deficiency, cardiovascular and other diseases. Its fiscal year ends September 30.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $3.51 million | $4.37 million |
| Operating expenses | $17.32 million | $19.27 million |
| Operating loss | $(13.81) million | $(14.90) million |
| Net loss | $(13.20) million | $(12.09) million |
| Basic and diluted loss per share | $(0.18) | $(0.17) |
| Operating cash flow | $(14.69) million | $10.00 million |
- Revenue was primarily from recognition of prior Amgen upfront payments and services. The filing attributes the year-over-year revenue decline mainly to lower revenue recognized from the ARO-LPA agreement.
- R&D expense was $8.43 million, down 11%; clinical-trial costs fell as prior trials were discontinued, while drug manufacturing and toxicology/efficacy costs rose as ARO-AAT and ARO-HBV advanced toward trials. Total operating expenses also include salaries and payroll costs of $3.99 million, G&A of $1.67 million, stock-based compensation of $2.09 million, and depreciation and amortization of $1.14 million.
- Other income was $0.61 million, versus $2.82 million a year earlier. The prior-year period included a $1.3 million insurance settlement; derivative fair-value gains also differed between periods. No income tax provision was recorded.
- At December 31, 2017, cash and cash equivalents were $11.53 million and short-term investments were $39.17 million, totaling $50.70 million. Cash and investments together declined about $14.91 million from September 30, 2017. Total assets were $88.22 million; current liabilities were $13.72 million.
- Note payable totaled $2.48 million, including current and long-term portions. The filing reports no off-balance-sheet arrangements. Operating cash flow was negative; investing activities provided $1.36 million, and financing activities provided $0.03 million.
- On January 22, 2018, the company sold 11.5 million shares at $5.25 per share, receiving approximately $56.7 million in net proceeds. Management said available resources were expected to fund operations for at least the next 12 months. Shares outstanding were 74.92 million at quarter-end and 86,787,566 as of February 7, 2018.
Material changes and developments
- Revenue decreased approximately 20% year over year, while net loss increased approximately 9%. Operating loss narrowed, reflecting lower operating expenses, but this was more than offset at the net-loss level by reduced other income and revenue.
- CTAs were filed during the quarter for ARO-AAT and ARO-HBV, intended to begin Phase 1 and Phase 1/2 studies, respectively. The company said these were the first of five planned regulatory submissions to advance candidates into clinical trials over the following 12 months.
- Amgen collaboration agreements provide potential option, development, regulatory and sales milestone payments of up to $617 million, plus royalties; these amounts are contingent, not guaranteed. Amgen has licensed ARO-LPA and holds an option relating to ARO-AMG1.
- Research and development purchase commitments were estimated at $13.6 million, of which approximately $11.1 million was expected to be incurred in fiscal 2018. Third-party technology-license milestones could reach the mid- to upper-double-digit millions; no such milestone was triggered during the quarter.
Outlook, risks and unusual items
- Management expects research, manufacturing and clinical-trial costs to increase as new subcutaneous candidates enter clinical studies. The company depends on external financing to support ongoing R&D and has historically financed operations through securities sales.
- Two securities class actions related to public statements about drug research had been dismissed with prejudice by the district court and appealed; related derivative actions were pending or stayed. The company recorded no liability. It said it could not predict the outcome or estimate potential liability in the more recent matter.
- The filing reports no material change to the risk factors in the prior Form 10-K. It also states disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
- Revenue disclosure to verify: The filing says $2.7 million of the ARO-LPA upfront payment was amortized into revenue in the quarter, while also describing recognition under that agreement as running through October 31, 2017. The timing description is not clear from the filing text.
Important facts for investors to verify
- Whether the January 2018 offering proceeds and resulting share count provide sufficient runway relative to the expected rise in clinical and manufacturing spending.
- Timing, regulatory progress and clinical outcomes for ARO-AAT, ARO-HBV and the other pipeline candidates, including the five planned submissions.
- Amgen option decisions and the conditions attached to potential milestone and royalty payments.
- The revenue-recognition timing and deferred-revenue balances under the Amgen agreements, particularly the ARO-LPA timing noted above.
- Developments in the securities litigation and the potential exposure, which the company says it cannot currently estimate for the more recent matter.