Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2016; fiscal year ends September 30. The filing is unaudited. Arrowhead develops RNA interference (RNAi) therapeutics and reported a pipeline spanning hepatitis B, alpha-1 antitrypsin deficiency, and other diseases. In April 2016, it changed its name from Arrowhead Research Corporation.
Financial results and liquidity
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $39,583 | $127,083 | $123,750; $338,250 |
| Operating expenses | $19.4 million | $60.1 million | $16.1 million; $71.1 million |
| Operating loss | $19.3 million | $59.9 million | $16.0 million; $70.7 million |
| Net loss | $19.4 million | $59.5 million | $15.9 million; $67.2 million |
| Loss per share, basic and diluted | $0.32 | $1.00 | $0.27; $1.19 |
| Operating cash used | Not stated for the quarter | $54.2 million | $53.7 million |
Comparable-period figures in the table are shown in the same order: three months, then nine months. Revenue was primarily from licensed technology, not product sales; revenue is too small to make operating margins a meaningful performance measure. No income tax provision was recorded.
- At June 30, cash and cash equivalents were $43.6 million and short-term investments were $1.0 million, down from $81.2 million and $17.5 million at September 30, 2015. Total assets were $85.5 million, versus $132.3 million.
- Cash declined $37.6 million over the nine months. Operating outflows of $54.2 million were partly offset by $16.3 million of investment maturities. Investing activities provided $15.2 million net; financing activities provided $1.5 million.
- Current assets were $49.6 million and current liabilities $14.8 million. Total liabilities were approximately $26.1 million. Reported debt-like obligations included $2.7 million of notes payable and $0.6 million of capital leases; the filing does not identify conventional long-term borrowings.
- On August 8, 2016, the company agreed to sell approximately 7.63 million common shares at $5.90 per share for $45 million gross proceeds, or approximately $43.2 million net. The note says closing was expected by August 12; MD&A later describes the financing as completed. The company said the financing and operating plan were expected to fund operations for at least 12 months.
Changes versus the prior year
- Third-quarter operating expenses rose 20% to $19.4 million, and net loss increased to $19.4 million from $15.9 million. Management attributed the expense increase mainly to ARC-521 manufacturing and toxicology costs ahead of a Phase 1/2 trial.
- Nine-month operating expenses fell 15% to $60.1 million and net loss narrowed to $59.5 million from $67.2 million. Lower ARC-520 manufacturing costs and no repeat of the prior-year $10.1 million acquired in-process R&D charge were important factors; clinical development and personnel costs remained significant.
- R&D expense was $9.4 million for the quarter, up 26%, but $29.8 million for the nine months, down 19%. Nine-month salaries and payroll-related costs increased 20% to $12.3 million, and general and administrative expense increased 43% to $8.0 million.
- Stock-based compensation was $7.5 million for the nine months and depreciation and amortization was $2.4 million. These are noncash expenses.
Outlook, developments, and risks
- Management expected program spending to increase as clinical candidates advance, trial enrollment grows, and manufacturing and toxicology work continues. The filing provides no numerical earnings or revenue guidance.
- ARC-520 Phase 2 studies continued. The company reported maximum HBsAg reduction of 1.9 logs in treatment-naive HBeAg-positive patients and said the candidate was generally well tolerated. ARC-AAT began patient dosing in Phase 1; ARC-521 entered a Phase 1/2 study in June 2016. These are company-reported development updates, not evidence of approval or commercial success.
- A new 10-year, approximately 60,000-square-foot Madison research facility was expected to be occupied in late 2016. Lease and tenant-improvement payments were expected to total about $15.4 million over the initial term, in addition to operating costs; estimated leasehold improvements net of allowances were about $7.3 million.
- Future commitments for drug manufacturing, toxicology, and clinical studies were approximately $49.8 million at June 30, including $8.0 million expected in the remainder of fiscal 2016. Certain technology-license milestones could reach the mid-to-upper tens of millions of dollars; some licenses also require mid-to-high single-digit royalties on relevant product sales.
- A securities class action and related derivative actions concerning statements about hepatitis B research remained pending. The company said it would vigorously defend itself, recorded no liability, and did not expect a material financial-statement effect. A separate Rice University licensing dispute was settled in May 2016 for a confidential amount; the company admitted no liability.
- Liquidity remained dependent on external financing and the anticipated equity sale. The filing cautions that without that financing, existing cash might not fund at least 12 months of operations. Clinical, regulatory, manufacturing, and development outcomes are uncertain. The company reported no material change in its previously disclosed risk factors or market-risk exposure.
Most important facts for investors to verify
- Whether and when the August 2016 share sale closed, net proceeds received, and resulting dilution.
- Cash burn and remaining runway against the stated 12-month liquidity expectation.
- ARC-520, ARC-AAT, and ARC-521 clinical progress, safety findings, enrollment, and upcoming trial costs.
- Timing and total cost of the Madison facility, the $49.8 million purchase commitments, and potential license milestones.
- Developments in the securities and derivative litigation, and any future financial impact.