Arrowhead Research Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing is by Arrowhead Research Corporation, the company name shown in the filing; the requested “Arrowhead Pharmaceuticals, Inc.” is not the registrant name in this document. This is an annual report, not a filing limited to 2011 Q4.
Business context
Arrowhead was a development-stage nanomedicine company focused on RNA interference (RNAi) therapeutics and drug delivery, alongside programs in obesity and regenerative medicine. Its principal clinical asset was CALAA-01, an RNAi oncology candidate in Phase I/Phase Ib development; Adipotide was a preclinical obesity candidate. The company reported no commercial product sales. It divested Unidym in January 2011 and, after year-end, acquired Roche’s RNAi assets and Madison research facility on October 21, 2011.
Financial performance and position
| Metric | FY2011 / September 30, 2011 | FY2010 / September 30, 2010 |
|---|---|---|
| Revenue | $296,139, primarily a therapeutic discovery grant | $0 continuing-operations revenue |
| Operating expenses | $10.13 million | $5.83 million |
| Operating loss | $9.83 million | $5.83 million |
| Consolidated net loss | $3.49 million | $6.96 million |
| Net loss attributable to Arrowhead | $3.13 million; $0.44 per basic share | $5.77 million; $0.90 per basic share |
| Cash and cash equivalents | $7.51 million | $6.85 million |
| Current assets / current liabilities | $9.86 million / $2.58 million | $8.13 million / $4.28 million |
| Total assets / total liabilities | $15.89 million / $3.32 million | $12.35 million / $4.28 million |
| Cash flow from continuing operations | Operating: $(7.66) million; investing: $(0.18) million; financing: $6.23 million | Operating: $(5.05) million; investing: $0; financing: $12.17 million |
Gross margin is not meaningfully reported for this development-stage business. Working capital was approximately $7.28 million. The balance sheet showed $606,786 of long-term notes payable and no current note payable; separately, Calando had a $500,000 principal convertible note outstanding, bearing 10% interest and generally payable at twice face value at maturity or specified events. Management reported cumulative net losses of approximately $131.5 million since inception.
Material changes and unusual items
- Consolidated net loss narrowed by about $3.46 million year over year, mainly because Unidym’s prior-year losses were replaced by FY2011 discontinued-operations income and a $3.92 million disposal gain. These items make the improvement a poor indicator of recurring operating performance.
- R&D expense increased to $3.28 million from $0.53 million, including a $2.0 million licensing fee to MD Anderson for Ablaris technology. G&A rose to $3.82 million from $2.49 million, largely due to professional, legal, consulting and patent costs, including Roche transaction preparation.
- Other income included a $1.13 million gain from changes in derivative values, partly offset by a $261,000 loss on marketable securities. Results are therefore affected by non-cash fair-value changes.
- Cash increased by $660,000 during FY2011, supported by equity financing and $2.27 million of cash from discontinued operations, while continuing operations used $7.66 million.
- On October 21, 2011, Arrowhead acquired Roche RNAi assets and operations for 901,702 shares and a $50,000 promissory note, with potential additional shares or cash, royalties and milestone payments. The facility added substantial personnel, rent and R&D costs after year-end.
Outlook, risks and contingencies
No numerical revenue or earnings guidance was provided. Management expected cash resources and subsequent financing to cover operations for at least 12 months from September 30, 2011, but anticipated further equity financings, asset sales or licensing agreements would be needed thereafter. It expected expenses to increase significantly in FY2012 and beyond following the Roche acquisition.
- Post-year-end financing included common-stock sales, $1.015 million of Series A convertible preferred stock, and a $15 million equity purchase facility with Lincoln Park Capital, subject to conditions and share issuance. Further issuance could dilute existing holders.
- Key business risks include sustained losses, limited cash resources, dependence on external capital and partnerships, clinical and regulatory failure, uncertain commercial adoption, competition, and evolving intellectual-property rights.
- CALAA-01 showed preliminary evidence of gene silencing in patients, but cytokine-related immune responses were observed; a modified-dosing Phase Ib study was underway. Safety, tolerability and efficacy remained unestablished.
- Adipotide had encouraging animal data, but its first-in-human study awaited FDA response to additional information. Animal results may not translate to people.
- Roche has a right of first negotiation on certain candidates, plus potential royalties and milestone payments. The company also disclosed contingent proceeds of up to $140 million from the Unidym sale, dependent on future commercialization milestones and outside Arrowhead’s control.
- Calando’s $500,000 note carries repayment terms that could create financial strain if triggered. License obligations and potential patent disputes may also affect development and commercialization.
The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2011; the auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Reconcile the reported consolidated net loss of $3.49 million with the $3.13 million loss attributable to Arrowhead and distinguish both from continuing-operations losses and the Unidym disposal gain.
- Confirm the timing, terms and actual proceeds of post-year-end financing, including the Lincoln Park facility, preferred-stock conversion conditions and potential dilution.
- Assess the full costs and obligations of the Roche acquisition, including staffing, leases, milestones, royalties, additional consideration and Roche’s negotiation rights.
- Track CALAA-01 Phase Ib safety and pharmacodynamic results and the regulatory status of Adipotide’s proposed clinical study.
- Review cash burn, runway assumptions, Calando’s note repayment terms, and collection or conversion of receivables and advances to affiliated companies.