Business context and reporting period
Arrowhead Pharmaceuticals, Inc. filed this unaudited Form 10-Q for its fiscal second quarter and six months ended March 31, 2017. The company develops RNA-interference therapeutics. Its pipeline included preclinical programs for hepatitis B, alpha-1 antitrypsin deficiency, hereditary angioedema and thromboembolic disorders, renal cell carcinoma, and cardiovascular targets.
In November 2016, Arrowhead discontinued clinical programs ARC-520, ARC-521 and ARC-AAT, which used its intravenous EX1 delivery vehicle, and redirected resources to subcutaneous and extra-hepatic delivery platforms. The company reduced its workforce by approximately 30%.
Financial results and liquidity
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $9.0 million | $13.4 million |
| Operating expenses | $15.1 million | $34.4 million |
| Operating loss | $6.1 million | $21.0 million |
| Net loss | $6.0 million | $18.1 million |
| Basic and diluted loss per share | $0.08 | $0.25 |
| Operating cash flow | $(4.3) million for the six-month period |
Revenue principally reflects recognition over time of Amgen collaboration payments, plus approximately $0.6 million from separate Amgen services work. The filing does not present a conventional gross margin; this is a development-stage company.
At March 31, 2017, Arrowhead had $61.7 million in cash and cash equivalents and $24.9 million in short-term investments, versus $85.4 million in cash and no short-term investments at September 30, 2016. Total assets were $126.9 million; current assets were $89.7 million and current liabilities were $27.6 million. The company reported $2.6 million of note payable, including current and long-term portions. Stockholders’ equity was $93.3 million.
Six-month investing cash outflow was $31.5 million, including $24.8 million invested in short-term securities and $6.7 million of capital expenditures. Financing cash inflow was $12.2 million, principally from Amgen’s $12.5 million equity investment. Management stated that available resources were expected to fund operations for at least the next 12 months.
Material changes versus the prior comparable period
- Quarterly revenue rose from $43,750 to $9.0 million; six-month revenue rose from $87,500 to $13.4 million, largely from Amgen collaboration revenue recognition.
- Quarterly net loss narrowed from $20.8 million to $6.0 million; six-month net loss narrowed from $40.1 million to $18.1 million. Management attributed the improvement mainly to collaboration revenue and lower research and development spending.
- Research and development expense fell 30% to $7.0 million for the quarter and 19% to $16.5 million for six months, reflecting discontinued clinical programs and reduced toxicology and manufacturing activity. Six-month clinical-trial expense nevertheless increased 21% to $7.9 million, in part because of pre-discontinuation activity and trial closeout costs.
- Cash decreased $23.6 million from September 30, 2016. The company shifted some cash into short-term corporate bonds; these investments had a reported fair value of $24.8 million at March 31.
- Common shares outstanding increased to 74.8 million from 69.7 million at September 30, 2016, including shares issued to Amgen and shares from conversion of preferred stock.
Outlook, commentary, risks and unusual items
- Amgen agreements provided $35 million in upfront payments and $21.5 million in equity investment; Arrowhead may also receive up to $617 million in option and milestone payments, plus royalties. These potential payments are contingent, not guaranteed revenue.
- Amgen received an exclusive license to ARO-LPA and an option for ARO-AMG1. Arrowhead recognizes the related upfront payments over specified performance periods, with substantial deferred revenue remaining on the balance sheet.
- Management said near-term toxicology, manufacturing and clinical-trial spending would be lower following program discontinuations, but could rise as new subcutaneous candidates approach clinical trials. No quantified earnings or revenue guidance was provided.
- The discontinued EX1 programs faced substantial delays while the company investigated deaths in a non-human-primate toxicology study. Management cited improved preclinical potency and safety margins with the subcutaneous platform as a reason for the strategic shift.
- Management reported April 2017 clinical data from discontinued programs that it said would inform ARO-HBV and ARO-AAT development. These post-period data do not establish the success of the newer candidates.
- Six-month other income included a $1.3 million insurance settlement and a $1.5 million gain from the change in fair value of derivative liabilities; derivative remeasurement is noncash and sensitive to share-price assumptions.
- Commitments included approximately $11.4 million of drug-development and study purchase commitments, $11.6 million of future minimum operating-lease payments, and potential third-party technology-license milestones that could reach the mid- to upper-double-digit millions. A $2.6 million note payable relates to the Madison facility.
- Securities class-action litigation relating to earlier drug-program statements remained pending on appeal, and a separate consolidated class action and related derivative action were pending. No liability was recorded; the company said it could not predict the outcome of the newer matter.
- A shareholder rights agreement adopted in March 2017 may impede or make a change of control more costly. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether ARO-HBV, ARO-AAT and other replacement-platform candidates progress from preclinical research into clinical trials, and whether safety and efficacy data support that transition.
- How quickly deferred Amgen payments are recognized as revenue, and whether Arrowhead meets collaboration deliverables and any conditions for additional payments.
- Cash burn and liquidity runway, particularly as capital needs may rise with new toxicology studies, manufacturing and clinical trials.
- The status and financial consequences, if any, of the pending securities and derivative litigation and the investigation underlying the discontinued EX1 programs.
- Potential dilution from equity awards, warrants and future share issuance; 74.8 million common shares were outstanding as of May 2, 2017.