Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparative period is the three months ended December 31, 2018. Financial statements are unaudited. Arrowhead develops RNAi therapeutics for a range of diseases.
Financial results and position
| Metric | Q1 FY2020 | Q1 FY2019 / comparison |
|---|---|---|
| Revenue | $29.5 million | $34.7 million; down 15% |
| Research and development expense | $23.4 million | $17.6 million; up 33% |
| General and administrative expense | $10.9 million | $6.1 million; up 78% |
| Operating income (loss) | $(4.9) million | $10.9 million |
| Net income (loss) | $(2.7) million; $(0.03) per diluted share | $12.0 million; $0.13 per diluted share |
| Operating cash flow | $(23.5) million | $168.3 million |
| Cash and cash equivalents at period-end | $461.0 million | $221.8 million at September 30, 2019 |
| Short- and long-term investments at period-end | $67.3 million | $81.1 million at September 30, 2019 |
| Total assets / stockholders’ equity | $587.6 million / $499.5 million | $349.8 million / $244.0 million at September 30, 2019 |
Revenue was primarily recognized over time under the Janssen collaboration and license arrangements. The filing reports no income tax provision. Gross margin is not presented as a separate measure. The company reported no notes payable; lease liabilities totaled $14.8 million, including current and long-term portions.
Material changes and cash flows
- Revenue declined mainly because of the timing of progress toward completing Arrowhead’s Janssen performance obligation; the prior-year quarter included greater recognized revenue from that arrangement.
- Higher R&D and G&A spending, together with lower revenue, drove the change from net income to a net loss. R&D increases reflected clinical trials, toxicology work, headcount and pipeline expansion; G&A increases included staffing, stock compensation and the new headquarters.
- Financing provided $253.5 million of cash, primarily from a December 2019 public offering of 4.6 million shares that generated $250.5 million net proceeds. Operating activities used $23.5 million; investing activities provided $9.3 million, primarily from investment maturities, partly offset by $4.3 million of capital expenditures.
- Prior-year operating cash flow was unusually high because it included substantial Janssen-related cash inflows. Cash and investments increased by $225.5 million during the current quarter, primarily due to the stock offering.
Business developments, outlook and risks
- Arrowhead began dosing in the ARO-AAT SEQUOIA Phase 2/3 study, which could serve as a pivotal registration study, and in a separate ARO-AAT Phase 2 pilot study. It filed an IND for an ARO-HIF2 Phase 1b study and a CTA for an ARO-HSD Phase 1 study, and reported clinical progress on ARO-APOC3 and ARO-ANG3.
- Janssen began its Phase 2b REEF-1 hepatitis B study, triggering a $25 million milestone to Arrowhead. Janssen also selected ARO-JNJ1 as its first collaboration target; Arrowhead’s discovery and preclinical work is funded by Janssen. Arrowhead may be eligible for further Janssen milestones and royalties, subject to development and commercial outcomes.
- Amgen continued development of ARO-LPA. It had declined to exercise its option for ARO-AMG1 in July 2019; no further milestones or royalties are expected under that program.
- Management stated that current cash and investments were expected to fund operations for at least the next 12 months. No specific financial guidance was provided. Management expects clinical, manufacturing and related program costs to rise as candidates advance.
- Unperformed purchase commitments for drug manufacturing, toxicology and clinical studies were estimated at $62.5 million, including $42.5 million expected in fiscal 2020. The filing reported no contingent liabilities recorded at quarter-end. It identified no material change to previously disclosed risk factors; clinical, regulatory, financing and commercialization uncertainties remain relevant.
- Arrowhead adopted the lease accounting standard effective October 1, 2019, recording $10.4 million of right-of-use assets and $14.8 million of lease liabilities; the company said adoption had no material effect on its income statement or cash flows.
Important facts for investors to verify
- Progress, enrollment and results in ARO-AAT, ARO-APOC3, ARO-ANG3, ARO-HIF2, ARO-HSD and partnered trials, including Janssen’s REEF-1 study.
- The pace of Janssen revenue recognition and the remaining $54.0 million of current deferred revenue, as well as milestone and royalty conditions under partner agreements.
- Cash use relative to the stated 12-month liquidity outlook, planned clinical and manufacturing spending, and the effect of future equity financing or share-based compensation on dilution.
- Timing and amount of the $62.5 million in purchase commitments and the company’s ability to advance its pipeline amid clinical and regulatory risks.