Arrowhead Pharmaceuticals, Inc. — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2018; filed May 8, 2018. The company develops RNA interference (RNAi) medicines and was advancing a clinical-stage and preclinical pipeline. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Mar. 31, 2018 | Prior-year quarter | Six months ended Mar. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $0.65 million | $8.99 million | $4.16 million | $13.35 million |
| Operating expenses | $15.68 million | $15.12 million | $33.01 million | $34.38 million |
| Operating loss | $15.03 million | $6.13 million | $28.85 million | $21.03 million |
| Net loss | $14.88 million | $6.04 million | $28.08 million | $18.13 million |
| Basic and diluted loss per share | $0.18 | $0.08 | $0.35 | $0.25 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(30.13) million | $(4.33) million |
Revenue declined primarily because the $30 million Amgen ARO-LPA upfront payment had been recognized over its performance period, which ended in October 2017. The company remained loss-making; operating margins are not meaningful as revenue was small relative to research and development spending.
At March 31, 2018, cash and cash equivalents were $69.8 million and short-term investments were $21.7 million, for combined cash and investments of about $91.5 million. Total assets were $127.0 million, current liabilities $9.1 million, and total liabilities approximately $13.3 million. Note payable was $2.43 million, related to financing tenant improvements. The company reported no contingent-consideration or derivative liability at period-end.
Six-month investing cash inflow was $18.2 million, mainly from investment maturities, and financing cash inflow was $56.9 million, principally the January equity offering. Cash increased by $45.0 million to $69.8 million. The company issued 11.5 million shares at $5.25 per share, receiving approximately $56.6 million net; shares outstanding rose from 74.8 million at September 30, 2017 to 87.6 million at March 31, 2018.
Material changes and management commentary
- Quarterly revenue fell about 93% year over year and six-month revenue fell about 69%, largely reflecting the completion of ARO-LPA upfront-payment revenue recognition. Six-month operating expenses decreased about 4%, while quarterly expenses rose about 4%.
- Research and development spending shifted toward clinical-program preparation: six-month drug manufacturing and toxicity/efficacy costs increased, while clinical-trial expense fell as prior-generation studies were closed out.
- CTAs were filed for ARO-AAT and ARO-HBV; both studies had begun dosing. Management described these as the first of five planned regulatory submissions to advance pipeline candidates into clinical trials over the following 12 months.
- Management stated current resources were sufficient to fund operations for at least the next 12 months. It also expected manufacturing, toxicology, and clinical-trial spending to increase as additional candidates advance.
Outlook, risks, contingencies, and unusual items
- Amgen collaboration terms include $35 million in upfront payments and a $21.5 million equity investment already received, with up to $617 million in potential option and development, regulatory, and sales milestones, plus royalties. These potential payments are contingent and are not assured revenue.
- ARO-AMG1 had approximately $1.3 million of deferred revenue remaining; the filing states the Arrowhead Deliverable was due September 28, 2018. ARO-LPA’s $30 million upfront payment was fully recognized by March 31, 2018.
- Estimated future purchase commitments for drug manufacturing, toxicology, and clinical studies were approximately $23.5 million, including $13.5 million expected in fiscal 2018. Third-party technology-license milestones could reach the mid-to-upper tens of millions of dollars; no milestone payment was triggered in the reported periods.
- Pending securities and derivative litigation remained a contingency. An earlier securities class action was affirmed dismissed on appeal; another class-action dismissal was appealed, with related derivative matters stayed. No liability was recorded for these cases; the company said it could not predict the outcome or estimate potential exposure for the latter matter.
- The January offering was a significant financing and increased the share count. The company disclosed no material change in risk factors or market-risk exposure, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Clinical progress, safety findings, and timing of planned submissions for ARO-AAT, ARO-HBV, and other candidates.
- Cash burn, investment balances, and the assumptions underlying management’s at-least-12-month liquidity estimate.
- Amgen program progress, option decisions, milestone conditions, and the timing of remaining deferred revenue recognition.
- Actual spending against the $23.5 million purchase commitments and potential technology-license obligations.
- Developments in the pending litigation and the effect of equity compensation or future financings on dilution.