Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparative results are for the three months ended December 31, 2015. The unaudited filing describes a clinical- and preclinical-stage RNAi therapeutics company.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter |
|---|---|---|
| Revenue | $4.37 million | $43,750 |
| Operating expenses | $19.27 million | $19.39 million |
| Operating loss | $14.90 million | $19.34 million |
| Net loss | $12.09 million | $19.26 million |
| Basic and diluted loss per share | $0.17 | $0.32 |
| Operating cash flow | $10.00 million provided | $21.15 million used |
- Revenue primarily reflects recognition over time of Amgen collaboration payments: $3.7 million from the ARO-LPA agreement and $0.6 million from ARO-AMG1. The $35 million in total upfront payments was largely recorded as deferred revenue rather than recognized immediately.
- Net loss narrowed year over year, mainly reflecting collaboration revenue and $2.82 million of other income. Other income included a $1.48 million noncash gain from derivative remeasurement and a $1.31 million insurance settlement. These items are not measures of recurring operating performance.
- Research and development expense was $9.53 million, down 8% year over year. Clinical-trial costs rose to $4.68 million, while toxicity/efficacy study and drug manufacturing costs declined.
- Cash and cash equivalents were $102.1 million at December 31, 2016, versus $85.4 million at September 30, 2016. Cash increased $16.7 million during the quarter. Operating cash generation benefited substantially from the Amgen upfront payment and deferred revenue; investing cash use was $5.30 million, primarily facility and laboratory capital spending. Financing provided $12.04 million, principally from Amgen’s $12.5 million share purchase.
- Total assets were $144.3 million. Current liabilities were $37.0 million, including $25.6 million of current deferred revenue; long-term liabilities were $10.1 million. The note payable was $2.68 million, including current and long-term portions. The filing reports no marketable-security investments.
- No profit margin is meaningful to report for this loss-making company; the filing does not present a margin measure.
Material changes and business developments
- In November 2016, Arrowhead discontinued clinical programs ARC-520, ARC-521 and ARC-AAT, all using its intravenous EX1 delivery vehicle. The company redirected resources toward subcutaneous and extra-hepatic delivery approaches and reported an approximately 30% workforce reduction.
- Management cited expected regulatory and development delays while investigating deaths in a non-human-primate toxicology study involving EX1 programs, as well as advances in alternative delivery systems. ARO-HBV and ARO-AAT were described as preclinical subcutaneous candidates; ARO-F12 and ARO-HIF2 were also in development.
- Under agreements with Amgen, Arrowhead received $35 million in upfront payments and $21.5 million in equity investment, and may receive up to $617 million in option and development, regulatory and sales milestones. It is also eligible for single-digit royalties on ARO-AMG1 products and up to low-double-digit royalties on ARO-LPA products. Amgen is responsible for clinical development and commercialization under the agreements; ARO-AMG1 remains subject to an Amgen option.
- During the quarter, Arrowhead issued 1,745,810 shares to Amgen at $7.16 per share for approximately $12.5 million. Common shares outstanding were 74.4 million at quarter-end; the filing reports 74.6 million outstanding as of February 3, 2017.
Outlook, risks and contingencies
- Management expected existing cash resources and its operating plan to fund operations for at least the next 12 months. Research and development is expected to continue requiring substantial cash investment; the filing provides no specific revenue or earnings guidance.
- Future research, clinical development and manufacturing costs, as well as progress and safety of the new delivery platforms, are key uncertainties. The company estimated $12.4 million in purchase commitments, expected to be incurred in fiscal 2017, and disclosed potential third-party technology-license milestones that could reach the mid- to upper-double-digit millions, plus royalties in certain agreements.
- Putative securities class actions and shareholder derivative matters remained pending. The earlier consolidated federal class action had been dismissed with prejudice, but plaintiffs appealed; the Bernstein derivative action remained pending. The company recorded no liability for these matters, said outcomes could not be predicted, and stated it intended to defend itself.
- Disclosure controls and procedures were judged effective, with no material change in internal control over financial reporting during the quarter. Management reported no material change in market-risk exposure or risk factors from its latest annual report.
Important facts for investors to verify
- Whether the company maintains the stated minimum 12-month liquidity runway, given operating cash use apart from collaboration receipts and ongoing research commitments.
- Progress, safety findings and regulatory path for the subcutaneous and extra-hepatic programs following discontinuation of EX1-based clinical candidates.
- Amgen collaboration performance obligations, recognition of deferred revenue, exercise of the ARO-AMG1 option, and potential milestones and royalties.
- Developments in the litigation, including the appeal and pending derivative and securities actions, and any resulting financial exposure.
- Capital spending and lease-related costs associated with the expanded Madison research facility.