Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2019; the company filed on August 5, 2019. This is its fiscal third quarter. Arrowhead develops RNA interference medicines and had no commercial drug sales; reported revenue was primarily from licensing and collaboration arrangements.
Financial performance
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $42.7 million | $0.7 million | $125.5 million | $4.9 million |
| Operating income (loss) | $18.6 million | ($15.9 million) | $51.6 million | ($44.8 million) |
| Net income (loss) | $20.3 million | ($15.6 million) | $56.3 million | ($43.7 million) |
| Diluted earnings (loss) per share | $0.21 | ($0.18) | $0.58 | ($0.53) |
- Revenue growth and the shift to profit were principally driven by recognition of revenue under the Janssen arrangements. Arrowhead recognized approximately $42.7 million for the quarter and $125.2 million for the nine-month period from the Janssen/JJDC arrangements.
- Research and development expense rose 60% to $19.3 million for the quarter and 56% to $57.7 million for nine months, reflecting higher clinical-trial, drug-manufacturing and toxicology costs. General and administrative expense increased 5% to $4.8 million for the quarter and 28% to $16.3 million for nine months.
- Operating margin was approximately 43.6% for the quarter and 41.1% for nine months, calculated from reported revenue and operating income. No income-tax provision was recorded; net operating loss carryforwards were offset by a valuation allowance.
Financial position and cash flow
- At June 30, 2019, cash and cash equivalents were $188.3 million, restricted cash $1.0 million, short-term investments $48.6 million and long-term investments $57.6 million. Total cash and investments were approximately $295.5 million.
- Total assets were $336.8 million and stockholders’ equity was $225.7 million. Current assets were $244.5 million versus current liabilities of $87.1 million. Deferred revenue totaled $97.9 million ($75.7 million current and $22.3 million long term).
- No note payable remained at quarter-end; the company paid off the prior note during fiscal 2019. The filing reports no defaults on senior securities.
- For the nine months, operating cash flow was $159.2 million, investing cash flow was negative $64.6 million and financing cash flow was positive $64.5 million; cash and restricted cash increased $159.2 million. Operating cash generation was substantially affected by collaboration-related receipts and deferred revenue, and should not be read as a recurring operating run rate.
- Cash and investments increased by approximately $218.9 million from September 30, 2018, primarily reflecting Janssen payments and the JJDC investment, partly offset by operating expenditures. Management said available resources were expected to fund operations for at least the next 12 months.
Material developments, outlook and risks
- Janssen’s October 2018 license and collaboration agreements provided a $175 million upfront payment; JJDC separately invested $75 million for company shares. Arrowhead earned a further $25 million Janssen milestone in April 2019. The company recorded an initial transaction price of approximately $227.4 million and recognizes it over time as it performs the JNJ-3989 license-related R&D obligations. Potential additional milestone and royalty amounts are contingent, not assured.
- Pipeline developments included FDA clearance to begin a potentially pivotal Phase 2/3 ARO-AAT study and FDA Fast Track designation; ARO-APOC3 and ARO-ANG3 trials had begun dosing. ARO-APOC3 received orphan designation in June and ARO-ANG3 in July 2019. These designations and trial progress do not guarantee approval or commercial success.
- In July 2019, after quarter-end, Amgen said it would not exercise its option for ARO-AMG1; no further milestone or royalty payments are expected under that agreement. Amgen continued its Phase 1 study of AMG-890 (ARO-LPA).
- Management expected R&D costs to rise as programs advance and additional candidates enter trials. No specific earnings or revenue guidance was provided. The business remains dependent on successful clinical development, regulatory outcomes, partnership economics and continued funding.
- Future commitments included approximately $53.8 million for manufacturing, toxicology and clinical studies, of which $42.3 million was expected beyond fiscal 2019. The company also disclosed operating lease commitments of $23.3 million and a new Pasadena headquarters lease estimated at $8.8 million over 91 months, plus approximately $3.8 million of leasehold improvements net of allowances.
- Several securities and derivative lawsuits remained pending or stayed. The company recorded no related liability, stated it intended to defend the matters, and said outcomes and potential exposure could not be predicted or reliably estimated. It reported no material change to its previously disclosed risk factors.
Important facts for investors to verify
- How much of reported revenue and operating cash flow reflects nonrecurring Janssen/JJDC consideration, and how will the remaining deferred revenue be recognized?
- Whether clinical, manufacturing and toxicology spending continues to increase as management anticipates, and how that affects the stated cash runway.
- Progress and results for ARO-AAT, JNJ-3989, ARO-APOC3 and ARO-ANG3, including the implications of trial outcomes and regulatory decisions.
- Effects of Amgen’s decision not to license ARO-AMG1 and the status of the ongoing AMG-890 program.
- Potential dilution: common shares outstanding rose to 95.2 million at June 30, 2019 from 88.5 million at September 30, 2018; the August 2 count was 95.3 million.
- Developments in pending litigation, contractual commitments and lease obligations, and the company’s adoption of lease accounting in fiscal 2020.