Arrowhead Research Corporation — Form 10-Q Summary
Period: Fiscal quarter and six months ended March 31, 2012; filed May 8, 2012. The filing identifies the registrant as Arrowhead Research Corporation, not Arrowhead Pharmaceuticals, Inc. Financial statements are unaudited and report a development-stage company.
Business context and financial position
Arrowhead focused on RNA interference (RNAi) therapeutics, alongside programs in obesity treatment and regenerative medicine. Its October 2011 acquisition of Roche’s RNAi assets included intellectual property and a research facility in Madison, Wisconsin, substantially expanding its staff and operating footprint.
| Metric | March 31, 2012 / period | Comparable or prior balance |
|---|---|---|
| Revenue, three months | $31,250 | $0 in prior-year quarter |
| Revenue, six months | $55,208 | $296,139 in prior-year six months |
| Operating loss, three months | $4.87 million | $1.81 million in prior-year quarter |
| Net loss attributable to Arrowhead, three months | $5.34 million; loss per share $0.50 | Net income of $2.91 million; earnings per share $0.40 |
| Net loss attributable to Arrowhead, six months | $7.82 million; loss per share $0.75 | Net income of $1.47 million; earnings per share $0.20 |
| Cash and cash equivalents | $3.60 million | $7.51 million at September 30, 2011 |
| Current assets / current liabilities | $8.82 million / $6.38 million | Working capital: $2.44 million |
| Total assets / stockholders’ equity | $20.08 million / $11.57 million | At September 30, 2011: $15.89 million / $12.56 million |
Revenue was immaterial relative to operating costs, so revenue margins are not meaningful. For the six months, operating expenses were $8.96 million, including $3.34 million in salaries and related costs, $2.20 million in general and administrative expense, and $2.13 million in R&D. Cash used in continuing operations was $6.86 million; investing activities provided $0.34 million and financing activities provided $2.61 million. Cash decreased by $3.91 million over the six months.
At quarter end, liabilities included $1.60 million in capital lease obligations, of which $0.21 million was current, and a $0.75 million net note payable. Calando’s underlying note has a $500,000 face amount, bears 10% interest, and may require repayment at twice principal under specified conditions, including maturity. Derivative liabilities totaled $1.64 million. Other receivables were $2.31 million and included amounts owed by minority-investment companies.
Material changes versus prior comparable periods
- Quarterly operating expenses rose to $4.90 million from $1.81 million; six-month expenses rose to $8.96 million from $5.44 million. The Roche Madison acquisition drove much of the increase in payroll, laboratory, facility, manufacturing, and depreciation costs.
- Six-month R&D expense declined to $2.13 million from $2.40 million, largely because the prior-year period included a $2.0 million licensing charge to MD Anderson.
- Six-month results shifted from income to loss. The prior-year six months included $5.36 million of income from discontinued operations, including a gain on disposal of Unidym; that gain did not recur.
- Current-quarter other expense included a $622,000 noncash derivative valuation loss. For the six months, other income included a $1.58 million noncash gain on the Roche Madison purchase, partly offset by derivative losses and equity-method losses.
- Common shares outstanding increased from 8.64 million at September 30, 2011 to 10.81 million at March 31, 2012; the filing also describes additional potential equity issuance and financing-related dilution.
Outlook, risks, contingencies, and unusual items
- Management expected available cash, financing collections, and other liquidity sources to fund operations for at least 12 months from the reporting date. It also stated that further equity financings, asset sales, or license agreements would be needed to fund future operations. Management expected higher cash expenses in fiscal 2012 and beyond as development activity expanded.
- Liquidity sources included $2.7 million of subscriptions receivable at quarter end, a $15 million equity-line facility with Lincoln Park Capital that had not been drawn by March 31, and a $2.5 million Wisepower convertible bond, redeemable January 17, 2013. The company had sold its remaining Wisepower shares in the quarter ended December 31, 2011.
- Roche transaction terms include potential royalties and milestone payments, including milestones of $2.5 million to $6.0 million, and Roche rights of first negotiation on certain candidates. The company recorded a $1.58 million acquisition gain. The filing states that further contingent terms apply.
- On April 5, 2012, Arrowhead acquired Alvos Therapeutics for 315,467 shares, with additional stock issuances of up to $23.5 million in value contingent on clinical, regulatory, and sales milestones.
- Key risks include continuing losses, limited cash and dependence on external financing, potential dilution, uncertain clinical and regulatory outcomes, difficulty securing partners and commercializing technology, intellectual-property and licensing risks, and increased costs from the Madison facility. The company cautioned that development-stage programs may fail and that it may never become profitable.
- The company reported no litigation expected to have a material adverse effect, no defaults upon senior securities, and effective disclosure controls. Management reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the registrant identity and reporting-period context: this filing is for Arrowhead Research Corporation for the quarter ended March 31, 2012.
- Track actual cash burn, collection of subscription receivables, and access to the equity line; the stated 12-month liquidity outlook depends on these sources and operating assumptions.
- Review the terms, maturity, and potential repayment obligations of Calando’s note, as well as the Wisepower bond’s collectability and redemption terms.
- Assess the ongoing cost and development contribution of the Roche Madison acquisition, including Roche royalties, milestones, and negotiation rights.
- Evaluate potential dilution from outstanding warrants, options, equity facilities, and milestone-based stock issuances, including the Alvos consideration.