Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparative periods ended June 30, 2016. The company develops RNA-interference therapeutics and reported a preclinical pipeline.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2017 | $9.34 million | $22.69 million |
| Revenue, 2016 | $39,583 | $127,083 |
| Operating loss, 2017 | $5.71 million | $26.75 million |
| Net loss, 2017 | $5.52 million | $23.65 million |
| Net loss, 2016 | $19.42 million | $59.50 million |
| Loss per share, 2017 | $0.07 | $0.32 |
| Loss per share, 2016 | $0.32 | $1.00 |
- Revenue primarily reflects recognition of Amgen collaboration payments and approximately $0.8 million of Amgen services revenue in the quarter. The Amgen upfront payments are recognized over performance periods, rather than entirely when received.
- Operating expenses were $15.06 million for the quarter and $49.44 million for the nine months. Research and development expense was $6.91 million and $23.41 million, respectively. The filing does not provide a meaningful gross margin measure.
- At June 30, cash and cash equivalents were $38.38 million and short-term investments were $36.75 million, totaling approximately $75.14 million. Current liabilities were $20.32 million; total assets were $115.08 million and stockholders’ equity was $89.54 million.
- Cash used in operations was $14.74 million over nine months; investing activities used $44.43 million, including $39.90 million for short-term securities and $7.81 million in capital expenditures. Financing provided $12.18 million, chiefly from the Amgen share issuance. Cash declined by $46.98 million, largely reflecting the transfer of cash into investments.
- Note payable was $2.58 million, including $0.20 million current. The Madison facility lease also creates substantial future lease payments; disclosed operating-lease commitments totaled $11.22 million.
Changes versus the prior comparable periods
- Revenue rose sharply from minimal levels, while quarterly and nine-month net losses narrowed. Management attributed the improvement mainly to Amgen revenue recognition and lower R&D expense after discontinuing earlier clinical programs.
- Nine-month R&D expense fell 21% to $23.41 million, while clinical-trial expense fell to $8.65 million. The company reported increased spending on supplies and facility-related costs as it expanded preclinical work and moved into its larger Madison facility.
- Amgen purchased 1,745,810 shares for approximately $12.42 million during the period. The Amgen agreements provided $35 million in upfront payments and $21.5 million in equity investment in total; the company may also qualify for up to $617 million in option and milestone payments and royalties.
Outlook, risks and unusual items
- Management said existing cash and short-term investments were expected to fund operations for at least the next 12 months. No quantified earnings or revenue guidance was provided.
- Arrowhead discontinued the ARC-520, ARC-521 and ARC-AAT clinical programs in November 2016 and redirected resources toward subcutaneous and extra-hepatic delivery platforms. The decision followed regulatory and safety-related delays associated with its former delivery vehicle, including investigation of deaths in a non-human-primate toxicology study. ARO-HBV and ARO-AAT were described as preclinical candidates; management expected manufacturing and R&D costs to increase as candidates advance toward clinical trials.
- Nine-month other income included a $1.52 million noncash gain from derivative revaluation and $1.31 million from an insurance settlement related to litigation. Derivative valuations depend on assumptions and changes in the company’s share price.
- Securities and derivative litigation remained pending. The company recorded no liability for these matters, stated it intended to defend itself, and said the outcome and potential exposure could not be predicted or reliably estimated. A prior hepatitis-B-related class action was dismissed with prejudice, but plaintiffs appealed.
- The company disclosed approximately $14.3 million of future purchase commitments for drug components, toxicology and clinical studies. Certain technology-license milestones could reach the mid- to upper-double-digit millions, with additional royalties if products are commercialized.
- A shareholder rights agreement may deter or make a takeover more difficult. The company also highlighted the risks inherent in forward-looking statements and clinical development.
Important facts for investors to verify
- Whether the preclinical delivery platforms and candidates progress into clinical trials, and the associated timing, safety and funding needs.
- Amgen collaboration performance obligations, remaining deferred revenue, any option exercise, and the conditions attached to potential milestones and royalties.
- Cash burn and the composition and liquidity of short-term investments; the stated runway depends on management’s operating plan.
- Status and potential financial impact of pending litigation, purchase commitments, lease obligations and technology-license milestones.
- Share dilution and governance implications of equity compensation, outstanding warrants and the rights agreement.