Arrowhead Research Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014; the filing was signed November 25, 2014. The company develops RNA-interference therapeutics and had no approved products. Its lead candidates were ARC-520 for chronic hepatitis B and ARC-AAT for liver disease associated with alpha-1 antitrypsin deficiency. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Revenue | $175,000 | $290,266 | Down about 40%; principally licensed-technology revenue, with no product sales. |
| Research and development expense | $23.1 million | $8.7 million | Up 166%, mainly clinical manufacturing, toxicology and trial costs. |
| Operating loss | $53.3 million | $24.6 million | Loss widened as development spending increased. |
| Net loss attributable to Arrowhead | $58.6 million | $31.1 million | Basic and diluted loss per share: $1.25 versus $1.30. |
| Operating cash used | $35.4 million | $19.0 million | Reflects higher R&D and corporate spending. |
| Cash and cash equivalents | $132.5 million | $19.1 million | At fiscal year-end. |
| Investments | $44.7 million | $10.7 million | Investment-grade corporate bonds, generally with maturities under two years. |
| Total assets | $182.8 million | $37.3 million | Substantially increased after equity financings. |
Gross and operating margins are not meaningful for this pre-commercial development company; revenue was minimal relative to expenses. Financing activities provided $185.3 million in cash, including $172.6 million net proceeds from two equity offerings and $12.9 million from warrant and option exercises. Common shares outstanding rose from 32.5 million to 54.7 million during the year. Management said resources were sufficient to fund operations for at least the next 12 months.
At September 30, 2014, current liabilities were $11.8 million and long-term liabilities $5.0 million. Debt was limited: $50,000 in notes payable and approximately $972,000 in capital-lease obligations. Other material obligations included $21.4 million in purchase commitments, of which $19.5 million was expected in fiscal 2015, and $2.9 million in operating-lease commitments. The filing reported no off-balance-sheet arrangements.
Material changes and unusual items
- Net loss increased to $58.7 million from $31.7 million; operating expenses rose to $53.5 million from $24.9 million, driven largely by ARC-520 development, increased staffing and clinical-readiness costs.
- Noncash charges included a $2.2 million impairment of abandoned Alvos in-process research and development, $2.4 million in contingent-consideration fair-value expense, and approximately $6.0 million of derivative-related expense. The derivative and contingent-consideration valuations rely on significant estimates.
- The company raised substantial equity capital, strengthening liquidity but materially diluting existing shareholders. It also deconsolidated Calando during the year; Calando entered Chapter 7 bankruptcy, and $4.5 million owed to Arrowhead was fully reserved.
- Fourth-quarter FY2014 revenue was $43,750; operating loss was $22.4 million and net loss attributable to Arrowhead was $22.4 million.
Pipeline, outlook and risks
- ARC-520: The Phase 1 single-dose study reported no serious adverse events or dose-limiting toxicities through 4 mg/kg. Interim Phase 2a results showed statistically significant HBsAg reduction versus placebo in the 2.0 mg/kg cohort through day 43; mean nadir was 51% below baseline, with a 22% reduction at day 85. These were early, limited clinical data, not evidence of a functional cure. The company planned to seek authorization for Phase 2b studies by the end of 2014, with a larger study anticipated to begin in early 2015.
- ARC-AAT: Preclinical studies showed substantial target knockdown in animal models. The company expected to seek authorization for a Phase 1 study by year-end 2014 and anticipated starting the study in early 2015. Clinical benefit and safety remained unproven.
- Management expected continued operating losses and significant R&D spending. No revenue or profitability guidance was provided. Clinical development, manufacturing, regulatory review and any eventual commercial uptake remain uncertain; additional capital may be required beyond the stated runway.
- Two putative securities class actions and a stockholder derivative action were filed after year-end concerning statements about hepatitis B research. Rice University also sued over an alleged breach related to former subsidiary Unidym. Arrowhead said it intended to defend the matters, recorded no liability and did not expect a material financial-statement effect.
- Key risks include clinical failure or adverse effects, uncertain translation of animal results, regulatory and manufacturing delays, dependence on third parties, intellectual-property and licensing disputes, reimbursement and pricing pressures, future financing needs and shareholder dilution. The filing also identifies substantial uncertainty around whether ARC-520’s antigen reduction will produce clinical benefit.
Important facts for investors to verify
- Subsequent ARC-520 and ARC-AAT trial progress, safety findings, efficacy durability and regulatory milestones against the company’s stated timelines.
- Cash burn, the availability and maturity profile of the bond portfolio, and whether the stated 12-month funding runway remains adequate as clinical programs advance.
- Details and potential dilution from outstanding preferred shares, options, restricted stock units and warrants.
- Developments, estimated exposure and any changes in accruals for the securities, derivative and Rice University litigation.
- Audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of September 30, 2014.