Arrowhead Research Corporation (now identified in the request as Arrowhead Pharmaceuticals) — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2015; statements are unaudited. The filing registrant is Arrowhead Research Corporation.
Business context and financial highlights
Arrowhead develops RNA interference therapeutics. Its lead clinical candidate was ARC-520 for chronic hepatitis B; ARC-AAT for alpha-1 antitrypsin deficiency had entered a Phase 1 trial. Revenue remained minimal, and the company funded operations primarily with cash from prior securities offerings.
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $43,750 | $43,750 | $214,500 | $87,500 |
| Operating loss | $(29.6) million | $(11.2) million | $(54.8) million | $(18.2) million |
| Net loss attributable to Arrowhead | $(28.7) million | $(13.9) million | $(51.3) million | $(24.6) million |
| Loss per share, basic and diluted | $(0.51) | $(0.31) | $(0.93) | $(0.60) |
| Operating cash used | — | — | $40.6 million | $14.7 million |
Gross margin is not meaningfully reported; revenue was primarily from licensed technology. No tax provision was recorded. No profitability guidance was provided.
Liquidity, debt and financial position
- At March 31, 2015, cash and cash equivalents were $96.4 million; held-to-maturity bonds totaled $31.9 million at amortized cost ($31.5 million fair value). Combined cash and investments at amortized cost were approximately $128.4 million.
- Cash declined $36.1 million over six months. Operating activities used $40.6 million; investing activities provided $4.3 million, largely from $12.2 million in investment maturities, offset by $7.0 million paid toward the Novartis asset acquisition and $0.9 million in capital expenditures. Financing provided $0.2 million.
- Current assets were $120.1 million and current liabilities $13.2 million, implying working capital of approximately $106.9 million. Total assets were $162.4 million and stockholders’ equity $144.2 million.
- Debt was limited: no notes payable remained at period-end; capital lease obligations totaled approximately $0.9 million, including current and long-term portions. The filing reports no off-balance-sheet arrangements.
- Management said existing resources and its operating plan were expected to fund operations for at least the next 12 months.
Material changes and unusual items
- Research and development expense rose to $29.4 million for the six months, from $8.3 million a year earlier. Manufacturing, clinical-trial and toxicology costs increased as the company prepared for ARC-520 Phase 2b studies and advanced ARC-AAT.
- The Novartis RNAi asset acquisition was recorded at $35.0 million: $25.0 million in Arrowhead shares and $10.0 million cash, with $7.0 million paid by March 31 and $3.0 million paid afterward. The company expensed $10.1 million for acquired preclinical candidates and capitalized approximately $24.9 million in patents and license assets. Additional development and sales milestones and royalties may be payable.
- Non-operating income included a $2.6 million gain from changes in derivative values for the six-month period; these noncash valuations are sensitive to Arrowhead’s share price. Stock-based compensation was $4.2 million for the six months.
- Common shares outstanding increased to 59.4 million from 54.7 million at September 30, 2014, including 3.32 million shares issued to Novartis.
Outlook, risks and contingencies
- Management expected Phase 2b ARC-520 trial costs, clinical enrollment costs and drug manufacturing expenses to rise. The company also expected to seek approvals for additional Phase 2b studies in Asia and Europe during FY2015.
- The filing says FDA approval for the ARC-520 Phase 2b application was received in April 2015, after quarter-end. It reported no dose-limiting toxicities or serious adverse events observed to date in ongoing ARC-520 Phase 2a studies.
- Purchase commitments for drug manufacturing, toxicology and clinical studies were approximately $49.7 million at March 31, of which $29.5 million was expected in the remainder of FY2015. License-related milestone obligations could reach the mid-to-upper double-digit millions; royalties may also apply.
- Seven shareholder securities and derivative actions relating to statements about hepatitis B research were pending, as well as a Rice University license dispute. The company said it intended to defend the matters, recorded no related liability, and did not expect a material financial-statement effect.
- Clinical, regulatory, manufacturing, financing and intellectual-property risks remain significant. Management reported no material change to the risk factors in its latest annual report.
Most important facts for investors to verify
- Whether ARC-520 Phase 2b trials started on schedule and whether later clinical and safety results support development plans.
- Whether the stated minimum 12-month liquidity outlook remains supportable given the $40.6 million six-month operating cash use and $49.7 million in purchase commitments.
- The full potential cost and commercial terms of the Novartis transaction, including milestone triggers, royalty rates and negotiation rights.
- Developments and potential financial exposure in the shareholder and Rice University litigation.
- The six-month net-loss figure: the financial statements report $51.262 million attributable to Arrowhead, while one MD&A passage gives $51.265 million; confirm the correct amount in the filed statements.