Arrowhead Pharmaceuticals, Inc. — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2019; filed May 8, 2019. Arrowhead develops RNA interference therapeutics and had no commercial product sales. Revenue was primarily from licensing and collaboration arrangements.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $48.1 million | $82.8 million |
| Operating expenses | $26.1 million | $49.8 million |
| Operating income | $22.0 million | $33.0 million |
| Net income | $23.9 million | $35.9 million |
| Diluted earnings per share | $0.24 | $0.37 |
| Operating margin | 45.7% | 39.8% |
- Revenue rose from $0.7 million to $48.1 million for the quarter, and from $4.2 million to $82.8 million year to date. The increase chiefly reflects recognition of Janssen-related consideration as Arrowhead performs its obligations, not product sales.
- Research and development expense increased 73% to $20.8 million for the quarter and 54% to $38.4 million year to date, driven largely by clinical-trial, drug-manufacturing, and toxicology activity. General and administrative expense increased 45% to $5.3 million for the quarter and 42% to $11.5 million year to date.
- At March 31, cash and cash equivalents were $161.6 million; short- and long-term investments totaled $124.1 million at amortized cost. Total cash and investments were approximately $285.7 million. Current assets were $235.0 million and current liabilities $101.8 million.
- Operating cash flow was positive $148.7 million for the six months, substantially reflecting collaboration receipts and the increase in deferred revenue. Investing cash flow was negative $79.0 million, mainly from purchases of marketable securities; financing cash flow was positive $61.8 million, mainly from the JJDC equity investment.
- The balance sheet reported no note payable at quarter-end; the remaining lease-related note was paid off in October 2018. Liabilities included $120.6 million of current and long-term deferred revenue. Total stockholders’ equity was $200.6 million.
- Common shares outstanding increased from 88.5 million at September 30, 2018 to 94.7 million at March 31, 2019. The company sold 3.26 million shares to JJDC for $75 million.
Material changes and business developments
- In October 2018, Janssen licensed JNJ-3989 (ARO-HBV) and entered a collaboration covering up to three additional targets; JJDC separately invested $75 million in Arrowhead. The agreements included a $175 million Janssen upfront payment, potential milestone payments, and royalties. Arrowhead reported an initial $226.3 million transaction price for the JNJ-3989 license and related services, recognized over time based on performance.
- In April 2019, Arrowhead earned a $25 million Janssen milestone after dosing began in a new triple-combination cohort in the JNJ-3989 study. The filing says a portion was reflected in contract assets/revenue based on performance completed by March 31.
- Other pipeline progress included FDA clearance in April to begin a Phase 2/3 ARO-AAT study with potential to be pivotal; ARO-ANG3 and ARO-APOC3 trials had begun dosing. Amgen was advancing AMG-890 (ARO-LPA) in Phase 1.
- At March 31, deferred revenue was $120.6 million and contract assets included $13.3 million related to Janssen services and milestone recognition. These balances reflect revenue-recognition timing and should not be treated as equivalent to cash still due.
Outlook, risks, and unusual items
- Management expected available cash and investments to fund operations for at least the next 12 months. It anticipated R&D costs would rise as more candidates enter and advance through clinical development.
- Future estimated purchase commitments for manufacturing, toxicology, and clinical studies were $52.1 million, including $27.1 million expected in fiscal 2019.
- An April 2019 Pasadena headquarters lease covers approximately 24,000 square feet over 91 months, with estimated payments of $8.8 million; Arrowhead expected approximately $4.5 million of leasehold improvements, net of allowances.
- Two groups of securities and derivative-related shareholder litigation matters remained disclosed. The company recorded no liability for these matters; one matter’s outcome and potential liability could not be estimated. It said it expected no material financial-statement effect from the earlier litigation matters.
- No material changes to the risk factors in the latest annual report were reported. Management stated disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
- Revenue and profit were unusually dependent on collaboration accounting and milestone-related arrangements; the company had not achieved commercial drug sales. The filing provides no formal revenue or earnings guidance.
Most important facts for investors to verify
- How much of recognized Janssen revenue represents cash received versus revenue recognized over time, and how future performance estimates affect deferred revenue.
- Clinical and regulatory progress, safety, and funding needs for ARO-AAT, JNJ-3989, ARO-ANG3, and ARO-APOC3, including the planned ARO-AAT Phase 2/3 study.
- Whether R&D spending, clinical-manufacturing commitments, and lease costs remain within the company’s liquidity and operating-plan assumptions.
- Potential dilution from outstanding equity awards and future financing, and the status and possible consequences of the pending securities and derivative litigation.