Arrowhead Pharmaceuticals, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also presents unaudited quarterly results, including Q4 FY2017. Arrowhead is a clinical-stage RNAi medicines developer; it reported no product-sales revenue.
Business context and pipeline
In FY2017, Arrowhead redirected development toward its Targeted RNAi Molecule (TRiM) platform and discontinued clinical programs using its intravenous DPC/EX1 delivery vehicle, including ARC-520, ARC-AAT and ARC-521. The company cited anticipated regulatory delays and deaths in a nonclinical primate toxicology study at doses above those planned for humans, alongside advances in TRiM technology.
Key wholly owned programs included ARO-AAT and ARO-HBV, with calendar Q1 and Q2 2018 CTA filings planned, respectively; ARO-APOC3, ARO-ANG3 and ARO-LUNG1, with Q4 2018 filings planned; and ARO-HIF2, with a 2019 filing planned. These are management plans, not assurances. ARO-LPA and ARO-AMG1 are partnered with Amgen.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $31.4 million | $0.16 million |
| Research and development expense | $31.7 million | $41.5 million |
| Total operating expenses | $68.4 million | $81.9 million |
| Operating loss | $37.0 million | $81.7 million |
| Net loss | $34.4 million | $81.7 million |
| Basic and diluted loss per share | $0.47 | $1.34 |
| Cash and cash equivalents at year-end | $24.8 million | $85.4 million |
| Short-term investments at year-end | $40.8 million | None |
FY2017 revenue chiefly reflected Amgen collaboration payments recognized as Arrowhead performed its obligations: $27.3 million from ARO-LPA, $2.5 million from ARO-AMG1 and approximately $1.5 million under a separate services agreement. Revenue was not recurring product revenue. No gross margin is reported; the filing does not provide a meaningful product-sales margin.
Operating cash used was $23.9 million, compared with $64.4 million in FY2016. Investing cash used was $48.6 million, primarily reflecting $45.0 million of net purchases of marketable securities and $7.9 million of capital expenditures. Financing cash provided was $12.1 million, largely from Amgen’s equity investment. Cash plus short-term investments totaled approximately $65.6 million at year-end. Management said available resources were expected to fund operations for at least 12 months.
Year-end total assets were $104.0 million and current assets were $67.9 million; current liabilities were $18.7 million. The balance sheet reported a $2.53 million note payable (approximately $0.21 million current and $2.33 million long-term). Contractual obligations totaled $26.7 million, including $11.4 million of purchase commitments expected in FY2018 and $10.8 million of operating lease payments. The filing reports no off-balance-sheet arrangements.
Changes, outlook, risks and unusual items
- Revenue increased sharply from FY2016 due primarily to Amgen collaboration revenue. The net loss narrowed by $47.3 million; lower R&D and other expenses also contributed. R&D expense fell 24%, mainly following discontinuation of prior clinical programs, although spending on new candidates was expected to rise as they approach clinical trials.
- Under its Amgen agreements, Arrowhead received $35 million in upfront payments and $21.5 million in equity investment and was eligible for up to $617 million in option and development, regulatory and sales milestone payments, plus royalties. Future payments are contingent; the ARO-AMG1 license option and development milestones are not assured.
- Management reported preclinical results including up to 92% AAT knockdown and up to 99.9% reductions in HBV markers in animal models. These findings do not establish safety or efficacy in humans. The company had no approved drugs and had incurred annual net losses since inception; it expected losses to continue and said future capital could be needed.
- FY2017 other income included a $1.3 million insurance settlement and approximately $0.9 million of noncash derivative gains. FY2016 included a $5.9 million gain from a reduction in contingent consideration following program discontinuations.
- Litigation remained outstanding. A prior securities class action was dismissed with prejudice and appealed; a separate class action concerning statements about drug research was dismissed without prejudice, followed by an amended complaint and a motion to dismiss. The company recorded no liability for these matters and could not estimate the outcome of the latter case.
- Other material risks include clinical and regulatory failure, the unproven nature of RNAi delivery and therapeutic hypotheses, dependence on partners and third-party manufacturers, intellectual-property challenges, reimbursement and pricing uncertainty, and potential future financing dilution. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether planned CTA submissions occurred on schedule and whether clinical data support the animal findings.
- Current cash burn, cash and investment balances, and whether the stated 12-month liquidity outlook remains adequate as trials advance.
- Amgen option exercise, development progress, milestone conditions and royalty terms; distinguish contingent potential payments from cash received.
- Progress and costs for the new TRiM programs, and any safety or regulatory implications of the discontinued EX1 programs.
- Status and potential consequences of the securities and derivative litigation, and the timing and amount of the $11.4 million FY2018 purchase commitments.