Arrowhead Research Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2014 (fiscal second quarter). The filing identifies the registrant as Arrowhead Research Corporation. It is a development-stage biopharmaceutical company developing targeted RNAi therapeutics, including a clinical program for chronic hepatitis B.
Financial performance
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 | Prior comparable period |
|---|---|---|---|
| Revenue | $43,750 | $87,500 | $43,750 and $202,766, respectively |
| Operating expenses | $11.26 million | $18.31 million | $5.43 million and $10.40 million |
| Operating loss | $11.21 million | $18.22 million | $5.39 million and $10.20 million |
| Net loss attributable to Arrowhead | $13.94 million | $24.57 million | $6.76 million and $11.37 million |
| Loss per share | $0.31 | $0.60 | $0.41 and $0.74 |
| Cash used in continuing operations | Not separately stated here | $14.72 million | $8.30 million |
Revenue was immaterial relative to research and development spending, so conventional operating margins are not meaningful. Six-month R&D expense increased to $8.35 million from $3.70 million, primarily reflecting drug manufacturing, outside-lab work and clinical-trial costs supporting ARC-520.
Liquidity, balance sheet and cash flow
- At March 31, 2014, cash and cash equivalents were $142.85 million; held-to-maturity bonds had $51.85 million amortized cost and $51.56 million fair value. Management described cash and liquid investments as approximately $194.7 million.
- Cash increased $123.73 million during the six months. Financing provided $180.42 million, principally from October 2013 and February 2014 equity offerings and option and warrant exercises. Investing used $41.96 million, including net purchases of fixed-income investments; operating activities used $14.72 million.
- Total assets were $202.64 million and stockholders’ equity was $189.54 million. Current liabilities were $10.48 million.
- Notes payable were $1.05 million current; capital lease obligations totaled approximately $1.08 million. Calando’s $1.0 million note was past due and unpaid. Derivative liabilities were $4.94 million and are not conventional borrowings.
Material changes and unusual items
- Operating costs and losses increased substantially year over year as the company expanded clinical and preclinical development. Six-month R&D spending more than doubled.
- The company raised approximately $60 million net in October 2013 and $112.6 million net in February 2014. Common shares outstanding rose from 32.49 million at September 30, 2013 to 51.87 million at March 31, 2014, reflecting significant equity issuance and dilution.
- Six-month other expense included a $6.47 million change in the value of derivatives, largely associated with warrants containing exercise-price adjustment provisions. This was a noncash, fair-value item and materially increased reported losses.
- Calando ceased operations and was in Chapter 7 bankruptcy proceedings. Arrowhead said repayment of its advances to Calando was unlikely and it could not estimate bankruptcy proceeds or their distribution among creditors.
Outlook, commentary and risks
Management stated that available resources and its operating plan were expected to fund operations for the next twelve months and beyond. The filing provides no specific revenue, earnings or clinical-development guidance. It notes that research, clinical trials and drug manufacturing will continue to require significant cash investment.
ARC-520 entered a Phase 2a pilot efficacy study in chronically infected hepatitis B patients in Hong Kong in March 2014, following completion of anticipated enrollment in a Phase 1 healthy-volunteer trial. Drug manufacturing and clinical-trial costs were rising to support this program. Management reported disclosure controls were effective and no material change in internal control over financial reporting. It reported no material changes to the risk factors in its prior annual report and no litigation believed likely to have a material adverse effect.
Investor verification priorities
- Track ARC-520 trial progress, safety and efficacy data, regulatory milestones, and the funding needed for continued development.
- Reconcile cash, bond maturities and investment liquidity with the company’s stated runway, planned operating spend and clinical commitments.
- Review future share issuance, preferred-stock conversion and outstanding options and warrants for potential dilution.
- Assess the valuation sensitivity and potential earnings impact of derivative liabilities and warrant-related fair-value changes.
- Verify the outcome of Calando’s bankruptcy, the status of its overdue note, and any recoveries or additional obligations for Arrowhead.