Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016. The company develops RNA interference (RNAi) medicines and reported a clinical-stage pipeline. In April 2016, it changed its name from Arrowhead Research Corporation to Arrowhead Pharmaceuticals, Inc.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2016 | Six months ended Mar. 31, 2016 |
|---|---|---|
| Revenue | $43,750 | $87,500 |
| Operating expenses | $21.3 million | $40.7 million |
| Operating loss | $21.3 million | $40.6 million |
| Net loss | $20.8 million | $40.1 million |
| Basic and diluted loss per share | $0.35 | $0.67 |
| Cash used in operating activities | $35.9 million for the six months |
Revenue was primarily from licensed technology; the filing reports no meaningful commercial product revenue or operating margin. At March 31, cash and cash equivalents were $50.3 million and short-term investments were $11.2 million, for $61.5 million combined. Current assets were $66.1 million, current liabilities $14.1 million, and total assets $94.6 million. Total liabilities were approximately $20.7 million, including $0.65 million in capital lease obligations and $5.9 million in contingent consideration. The filing reports no conventional borrowings.
Cash declined $30.9 million from September 30, 2015. Operating cash use of $35.9 million was partly offset by $6.2 million of investment maturities; investing activities provided $5.7 million overall, while financing activities used $0.7 million.
Changes versus prior comparable periods
- Quarterly net loss improved from $28.7 million to $20.8 million; six-month net loss improved from $51.3 million to $40.1 million. Loss per share improved from $0.51 to $0.35 for the quarter and from $0.93 to $0.67 for the six months.
- Operating expenses fell 28% for the quarter and 26% for the six months. Management attributed the decrease mainly to lower ARC-520 manufacturing costs; the prior-year six-month period also included $10.1 million of acquired in-process R&D expense.
- Six-month R&D expense decreased 31% to $20.4 million, while salaries and payroll costs rose 22% to $8.2 million and G&A expense rose 53% to $5.8 million. Clinical-trial and toxicology costs increased in some periods as manufacturing costs declined.
- Six-month revenue decreased to $87,500 from $214,500; quarterly revenue was unchanged at $43,750.
- Operating cash use improved from $40.6 million to $35.9 million, but cash and cash equivalents fell from $81.2 million at September 30, 2015 to $50.3 million.
Outlook, developments, and risks
- Management states current cash resources may not be sufficient to fund operations for at least the next 12 months. The company expects continued substantial R&D spending and may seek collaboration funding or sell securities, which could dilute shareholders.
- ARC-520 Phase 2 studies were enrolling. The company reported no dose-limiting toxicities or serious adverse events to date and cited study data showing substantial HBsAg reductions in treatment-naïve HBeAg-positive patients. These are company-reported interim findings, not a guarantee of clinical benefit.
- ARC-AAT had completed protocol-required healthy-volunteer dosing in an ongoing Phase 1 study and begun dosing patients. ARC-521, ARC-F12, ARC-LPA, and ARC-HIF2 were among the additional pipeline candidates described.
- The company signed a 10-year Madison research-facility lease. Base payments are expected to total approximately $15.4 million; estimated leasehold improvements are $7.3 million net of tenant allowances. The company also disclosed approximately $49 million in future purchase commitments, including about $17 million expected in the remainder of fiscal 2016. Licensed-technology milestones could reach the mid-to-upper double-digit millions, with royalties potentially in the mid-to-high single digits of product sales.
- Litigation includes securities and derivative actions related to statements about hepatitis B research, for which no liability was recorded, and a Rice University license dispute. The company says a liability for the Rice matter became probable and reasonably estimable in April and May 2016 and was recorded in the March 2016 financial statements; the amount is not clearly stated in the filing text and was described as not material.
- Derivative liabilities and contingent consideration are Level 3 fair-value estimates subject to significant assumptions. The company reported no material change to its previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Cash runway and the timing, amount, and terms of any financing or partnership; management cautions that existing resources may not cover at least 12 months.
- Clinical-trial progress, safety, enrollment, and whether interim ARC-520 findings are confirmed in larger or later-stage studies.
- The amount and potential future consequences of the Rice University litigation accrual, alongside the status of the other lawsuits.
- Expected cash costs of the new facility, leasehold improvements, and the $49 million purchase commitments.
- Potential dilution from securities issuance, convertible preferred stock, options, restricted stock units, and warrants.