ARROWHEAD PHARMACEUTICALS, INC. quarterly report, Q3 FY2012

Business context and reporting period

Arrowhead Research Corporation (the registrant named in this filing; the request identifies Arrowhead Pharmaceuticals, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2012, the third quarter of its fiscal year. Arrowhead was a development-stage nanomedicine company focused on RNA-interference (RNAi) therapeutics and related delivery technologies, with additional programs in obesity and regenerative medicine.

Financial performance and position

Amounts are in U.S. dollars. The filing reports very limited revenue and substantial development-stage losses; it does not present a meaningful gross margin.

At June 30, 2012, cash and cash equivalents were $2.283 million, down $5.225 million from September 30, 2011. Investing activities provided $262,280 and financing activities provided $5.265 million over the nine months. Current assets were $5.903 million and current liabilities were $5.815 million, leaving approximately $88,000 of working capital (current ratio about 1.02). Current assets included a $2.402 million net note receivable.

Total liabilities were $8.039 million. The balance sheet included $793,513 of long-term notes payable, plus capital lease obligations of $1.550 million in total ($213,196 current and $1.337 million long-term). Stockholders’ equity was $8.449 million. Common shares outstanding were 11,310,816 at June 30, 2012.

Material changes versus the prior comparable periods

• Nine-month operating expenses rose to $15.814 million from $7.214 million, principally reflecting the Roche Madison acquisition and expanded staff, facilities, and research activity. Salaries and payroll-related costs increased to $4.993 million from $1.088 million; research and development expense rose to $3.347 million from $2.768 million; and general and administrative expense increased to $5.335 million from $2.076 million.
• Nine-month loss attributable to Arrowhead increased to $15.812 million from $352,362. The prior-year period included $5.293 million of net income from discontinued operations, including the Unidym disposal; the current period did not repeat that benefit.
• Revenue declined to $103,125 from $296,139 for the nine months. Current-period revenue related to license agreements acquired with Roche Madison; prior-period revenue included grants.
• Cash fell from $7.507 million at September 30, 2011 to $2.283 million at June 30, 2012, despite $5.401 million of net proceeds from common-stock and warrant issuance during the nine months.

Outlook, commentary, risks, and unusual items

• Management expected available cash and other identified liquidity sources to fund operations for at least 12 months from the reporting date. It also said future operations would require additional equity financing, asset sales, or licensing agreements. The filing gives no revenue or earnings guidance.
• On August 13, 2012, the company reported firm commitments for a registered offering of 2.3 million units at $2.76 per unit, with expected gross proceeds of approximately $6.2 million and net proceeds of approximately $5.8 million. Each unit included one common share and a warrant for 0.75 share exercisable at $3.25.
• The Roche Madison acquisition added a research facility and 41 employees; management expected the resulting higher cash expenses to continue as development activity accelerated. The acquisition also carries potential milestone payments, royalties, and a right of first negotiation for Roche on certain product candidates.
• Arrowhead acquired Alvos Therapeutics in April 2012 for stock valued at $2.0 million. Former Alvos shareholders could receive additional stock valued at up to $23.5 million upon specified clinical, regulatory, and sales milestones.
• Arrowhead recorded a $1.456 million noncash impairment charge to reduce its Nanotope investment to zero and fully reserved a $1.9 million receivable from Nanotope. It also recorded a $876,277 loss on disposal of fixed assets acquired with Roche Madison. These and other items affected reported results.
• Key risks include continuing losses, limited cash and dependence on additional financing, potential dilution, uncertain drug-development and regulatory outcomes, reliance on partners and license agreements, and the possibility that programs will not produce commercially viable products. The company disclosed no litigation it believed would materially adversely affect its financial condition or results.

Important facts for investors to verify

• Confirm the post-quarter registered offering’s closing, net proceeds, and resulting share and warrant dilution.
• Assess cash burn against management’s stated 12-month liquidity outlook, including continuing costs of the Madison facility and planned development activity.
• Review collectability and timing of the $2.402 million note receivable, including the Wisepower bond due January 2013, and collection of the $1.0 million subscription receivable.
• Verify the status and potential economics of Roche-related obligations, Alvos milestone consideration, and Calando’s 10% note, which matures in November 2013 and may require payment at twice principal under specified conditions.
• Evaluate the Nanotope impairment and receivable reserve, and monitor any further impairment or recovery developments.