Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. Unaudited financial statements; amounts below are in USD millions except per-share data.
Business context and reporting period
Arrowhead develops RNA interference medicines. Its pipeline includes programs for cardiometabolic, liver, pulmonary, cancer and genetic diseases, alongside partnered programs with Janssen and Amgen. ARO-AAT is being co-developed with Takeda. The company remains a development-stage business reliant on collaboration revenue and financing while investing in research and clinical development.
Financial performance
| Metric | Three months ended Mar. 31, 2021 | Three months ended Mar. 31, 2020 | Six months ended Mar. 31, 2021 | Six months ended Mar. 31, 2020 |
|---|---|---|---|---|
| Revenue | $32.8 | $23.5 | $54.1 | $53.0 |
| Research and development | $44.7 | $29.4 | $81.3 | $52.8 |
| General and administrative | $16.3 | $16.3 | $25.1 | $27.3 |
| Operating loss | $(28.2) | $(22.2) | $(52.3) | $(27.1) |
| Net loss | $(26.8) | $(19.8) | $(47.6) | $(22.5) |
| Diluted loss per share | $(0.26) | $(0.20) | $(0.46) | $(0.23) |
Quarterly revenue increased 39% year over year, mainly from recognizing Takeda collaboration revenue. Six-month revenue rose 2%. Operating expenses exceeded revenue in both periods. Operating margin was approximately -86% for the quarter versus -95% a year earlier, and -97% for the six months versus -51%. These are calculated from reported revenue and operating loss; the filing does not present a gross margin measure.
Cash flow: For the six months, operating cash flow was positive $225.0, investing cash flow was negative $3.9, and financing cash flow was positive $7.7. Cash and cash equivalents increased $228.8 to $372.4. The operating cash inflow largely reflects receipt of Takeda’s $300.0 upfront payment and the related increase in deferred revenue; it should not be read as recurring operating cash generation.
Liquidity and obligations: At March 31, cash and cash equivalents were $372.4, marketable securities $125.8, short-term investments $79.1 and long-term investments $97.5. Total assets were $756.8; current liabilities were $167.2 and stockholders’ equity was $445.5. The filing reports no borrowings; lease liabilities totaled $23.8, including current and long-term portions. Deferred revenue was $266.4, principally related to Takeda. Management expects available financial resources to fund operations for at least the next 12 months.
Material changes versus the prior comparable period
- Quarterly R&D expense increased 52% to $44.7; six-month R&D rose 54% to $81.3. Management attributed increases to expanding the pipeline, higher clinical-trial and manufacturing costs, increased headcount and research facilities.
- Quarterly net loss widened to $26.8 from $19.8; six-month net loss widened to $47.6 from $22.5. Higher R&D spending was partly offset by collaboration revenue.
- Cash and investments increased by $221.8 from September 30, 2020, primarily due to Takeda’s $300.0 upfront payment, partly offset by operating expenditures.
- Quarterly G&A was nearly unchanged; six-month G&A declined 8%, partly reflecting lower stock compensation and prior-year bonus timing.
Outlook, commentary, risks and unusual items
- Takeda agreement: The $300.0 upfront payment was received in January 2021. Arrowhead recognizes it over its R&D performance obligations; $144.9 was classified as current deferred revenue and $121.5 as long-term deferred revenue at quarter-end. The agreement provides for U.S. 50/50 profit sharing if approved, ex-U.S. royalties of 20%–25%, and potential milestones up to $740.0.
- Other collaborations: Janssen began dosing in its Phase 2b REEF-1 hepatitis B study, triggering a $25.0 milestone. Amgen’s olpasiran program had entered Phase 2 in July 2020; the company may receive up to $400.0 in remaining milestones under that agreement.
- Pipeline: Management reported positive interim ARO-AAT Phase 2 data and positive cardiometabolic candidate data, and filed IND applications for Phase 2b studies of ARO-APOC3 and ARO-ANG3. These are investigational programs, not approved products.
- Spending and commitments: Management expects R&D and related costs to rise as candidates advance. Purchase commitments were approximately $136.0, of which $78.0 was expected during the remainder of fiscal 2021. Additional office and laboratory expansion entails lease and improvement costs.
- COVID-19: Management said reported-period financial results were not significantly affected; earlier ARO-AAT enrollment pauses had resumed. Further effects on clinical enrollment, suppliers, employees and timelines remain uncertain.
- Contingencies and controls: No contingent liability was recorded at March 31, 2021. No material changes to the risk factors in the prior Form 10-K were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of future reported revenue and operating cash flow depends on recognizing upfront collaboration payments, versus recurring or milestone-based receipts.
- Clinical progress, enrollment, safety and regulatory milestones for ARO-AAT, ARO-APOC3, ARO-ANG3, JNJ-3989 and olpasiran, including the timing and likelihood of potential milestone payments.
- Whether escalating R&D, clinical manufacturing and facility costs remain within the company’s available liquidity and management’s stated 12-month funding outlook.
- The effect of stock-based compensation and potential share issuance on dilution; 104.0 million common shares were outstanding at March 31, 2021, with additional equity awards reserved or outstanding.
- Potential exposure from purchase commitments, leases, licensed-technology milestones and royalties, as well as any future COVID-19-related disruption.