Arrowhead Research Corporation (ARWR) — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing identifies the registrant as Arrowhead Research Corporation; it is a development-stage, clinical-stage targeted therapeutics company. This is an annual report, not a quarterly report.
Business context
During FY2012, Arrowhead shifted from a diversified nanotechnology holding company to a focused therapeutics business. It acquired Roche’s RNAi business, including delivery technologies and a 24,000-square-foot Madison, Wisconsin research facility, and acquired Alvos Therapeutics’ human-derived Homing Peptide platform. Its programs span oncology, obesity, and chronic hepatitis B (HBV); it has no marketed products and relies principally on financing and partnerships.
- ARC-520: RNAi candidate for chronic HBV; IND-enabling work was underway, with a Phase 1 trial targeted for 2013.
- Adipotide: anti-obesity candidate entered a Phase 1 trial in 2012; MD Anderson planned to enroll up to 39 patients and bear direct trial costs.
- CALAA-01: RNAi oncology candidate completed Phase 1b enrollment in August 2012; final data analysis was being prepared. The filing describes transient cytokine responses and a modified dosing approach.
- Partnerships: Alnylam licensed DPC technology for one product in January 2012. In December 2012, after year-end, Arrowhead signed a Shire collaboration for targeted peptide-drug conjugates, with potential milestones and royalties.
Financial performance and position
| Metric | FY2012 / September 30, 2012 | Comparable prior period |
|---|---|---|
| Revenue | $146,875 | $296,139 |
| Operating expenses | $21.24 million | $10.13 million |
| Operating loss | $21.09 million | $9.83 million |
| Consolidated net loss | $22.11 million | $3.49 million |
| Net loss attributable to Arrowhead | $21.13 million | $3.13 million |
| Cash and cash equivalents | $3.38 million | $7.51 million |
| Current assets / current liabilities | $6.57 million / $5.33 million | $9.86 million / $2.58 million |
| Total assets / total liabilities | $16.53 million / $7.72 million | $15.89 million / $3.32 million |
Cash used in operating activities of continuing operations was $15.34 million; the MD&A rounds operating cash use to $16.0 million and describes it as including ongoing program and corporate costs. Investing activities provided $0.44 million, while financing activities provided $10.77 million, principally from stock and warrant issuance. Cash declined $4.13 million during the year. No meaningful operating margin is indicated given minimal revenue and ongoing losses.
At year-end, the balance sheet included $839,421 of long-term notes payable, $1.50 million of capital-lease obligations (current and long-term combined), and $647,213 of derivative liabilities. Calando had a $500,000 face-value unsecured convertible note bearing 10% interest, due November 2013; the filing says it is payable at twice face value at maturity and upon certain triggering events. A December 2012 public offering raised gross proceeds of $4.3 million, including a $500,000 promissory-note component, and was expected to incur approximately $300,000 in costs.
Material changes and unusual items
- Net loss increased by $18.62 million year over year. FY2011 included $5.29 million of income from discontinued operations, principally associated with the Unidym divestiture; FY2012 did not repeat that benefit.
- Research and development expense increased to $5.39 million from $3.28 million; salary and payroll-related costs rose to $6.41 million from $1.41 million. The company attributed the higher cost base primarily to the Roche Madison acquisition, employees, facility, and accelerated development activity.
- FY2012 included a $2.50 million reserve against receivables from unconsolidated affiliates, $1.64 million of investment impairment charges, a $1.08 million loss on disposal of equipment, and a $1.58 million gain on the Roche Madison acquisition. These items affected reported results and are not presented as recurring operating performance.
- Arrowhead fully reserved its Nanotope investment and receivable; Nanotope had closed its own R&D facility. Leonardo’s investment and receivable were also fully reserved at year-end.
- Common shares outstanding increased from 8.64 million to 13.58 million during FY2012. The August 2012 offering generated approximately $5.8 million net proceeds and included warrants; the filing also describes a $15 million equity-line facility, of which $1 million had been drawn by year-end.
Outlook, risks, and contingencies
The independent auditor’s report and management state that recurring losses, negative operating cash flows, and dependence on additional financing raise substantial doubt about the company’s ability to continue as a going concern. Management expected further equity financing, asset sales, and/or license and collaboration agreements to be needed. It warned that insufficient capital could force delays, reductions, or discontinuation of programs, licensing of rights on unfavorable terms, or cessation of operations. Management expected the higher cost structure associated with the Madison facility and development efforts to continue.
Key risks include clinical and regulatory failure, delivery-platform safety or efficacy, inability to secure financing or partners, dilution, dependence on third-party manufacturing and licensed intellectual property, and uncertain milestone or royalty receipts. CALAA-01’s observed cytokine response and the Calando note’s accelerated repayment provisions are notable program and financing contingencies. The filing reports no legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting as of September 30, 2012.
Important facts for investors to verify
- Cash runway and liquidity after the December 2012 offering, including the timing and collectability of the Wisepower bond receivable and other receivables.
- Exact cash proceeds and terms of the December offering, particularly the relationship between the stated $4.3 million gross proceeds and the $500,000 promissory-note component.
- Clinical progress and safety findings for ARC-520, Adipotide, and CALAA-01, including whether stated trial milestones were achieved.
- Potential dilution from outstanding warrants, options, the equity-line facility, and future financing needs.
- Calando’s note balance, trigger provisions, and ability to meet its November 2013 obligations; also confirm capital-lease and other-liability classifications in the full financial statements.