Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Financial statements are unaudited. Arrowhead develops RNA interference medicines; it has a clinical-stage pipeline and licenses or collaborates on selected programs with Janssen and Amgen.
Financial performance
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Revenue | $23.5 million | $48.1 million | $53.0 million | $82.8 million |
| Operating income (loss) | $(22.2) million | $22.0 million | $(27.1) million | $33.0 million |
| Net income (loss) | $(19.8) million | $23.9 million | $(22.5) million | $35.9 million |
| Diluted earnings (loss) per share | $(0.20) | $0.24 | $(0.23) | $0.37 |
| Operating cash flow | Not separately stated for the quarter | $(51.1) million | $148.7 million |
Second-quarter operating expenses were $45.8 million, including $29.4 million of R&D and $16.3 million of G&A. For the six months, expenses were $80.1 million: R&D $52.8 million and G&A $27.3 million. Second-quarter operating and net margins were approximately negative 94% and negative 84%, respectively; the comparable 2019-quarter margins were positive 46% and 50%.
At March 31, 2020, Arrowhead had $256.7 million in cash and cash equivalents, $51.0 million in short-term investments and $190.6 million in long-term investments—approximately $498.2 million combined. Total assets were $561.1 million and stockholders’ equity was $493.6 million. Current liabilities were $53.3 million. The filing reports $14.9 million of operating lease liabilities and no recorded contingent liabilities; it does not identify outstanding borrowings at period end.
Six-month cash flows included $168.8 million used in investing activities and $254.8 million provided by financing activities. Financing primarily reflected $250.5 million net proceeds from a December 2019 stock offering. The offering sold 4.6 million shares for $266.8 million gross proceeds. Shares outstanding were 101.7 million at March 31, versus 95.5 million at September 30, 2019.
Material changes versus prior periods
- Revenue declined 51% in the quarter and 36% for the six-month period. Management attributed the decrease primarily to the timing of progress-based revenue recognition under the Janssen/JJDC agreements.
- The company moved from profit to loss as lower revenue coincided with higher operating expenses. R&D increased 42% in the quarter and 38% for six months; G&A increased 206% and 137%, respectively. Growth, expanded clinical activity and higher stock-based compensation contributed to the increases.
- Operating cash flow shifted from $148.7 million provided in the prior six-month period to $51.1 million used, with a $49.6 million reduction in deferred revenue among the reported operating cash flow changes. The prior period included substantial collaboration-related cash inflows.
- Cash and investments rose substantially from September 30, 2019, mainly due to the December equity offering. Long-term investments increased to $190.6 million from $44.2 million.
Outlook, risks and notable items
- Management said current cash and investments, together with its operating plan, should fund operations for at least the next 12 months. No specific revenue, earnings or other financial guidance was provided.
- COVID-19 had not significantly affected reported results through March 31, but enrollment in the two ARO-AAT studies, SEQUOIA and ARO-AAT 2002, was paused. The company was working to resume screening and enrollment; enrolled patients continued dosing and follow-up. Management noted uncertainty around further trial, supply-chain and operational impacts.
- Pipeline developments included initiation of ARO-AAT studies, progress in ARO-APOC3 and ARO-ANG3, and regulatory filings for studies of ARO-HIF2, ARO-HSD and ARO-ENaC. Janssen began dosing in its REEF-1 Phase 2b hepatitis B study, triggering a $25 million milestone; Janssen also selected ARO-JNJ1 for research and preclinical development.
- Janssen-related deferred revenue was $33.2 million at quarter-end, to be recognized as the company completes its performance obligation. The company reported $72.2 million of future purchase commitments, approximately $40.0 million expected in fiscal 2020, plus a $0.9 million accrued ARO-ENaC license milestone.
- Stock-based compensation was $17.5 million for the six-month period, versus $5.3 million a year earlier. The company also adopted lease accounting guidance, recording $10.3 million in right-of-use assets and $14.9 million in lease liabilities.
- Management identified clinical development, trial enrollment, regulatory progress, manufacturing and financing access as significant uncertainties. The filing states disclosure controls were effective and no material change in internal controls occurred during the quarter.
Important facts for investors to verify
- Whether ARO-AAT enrollment resumed and how COVID-19 affected trial schedules, sites and suppliers after the reporting date.
- Revenue-recognition assumptions and remaining performance obligations under the Janssen agreements, including the expected pace of recognizing the $33.2 million deferred balance.
- Cash consumption and investment balances relative to clinical, manufacturing and other spending plans; assess the $72.2 million purchase commitments alongside management’s stated 12-month liquidity outlook.
- Progress and results for the clinical pipeline, including partnered programs and milestone conditions; milestone and royalty amounts are contingent, not guaranteed revenue.
- The effect of increased equity compensation and share issuance on future expenses and shareholder dilution.