Arrowhead Research Corporation (identified in the filing; metadata says Arrowhead Pharmaceuticals) — Q1 FY2015 10-Q
Reporting period: Three months ended December 31, 2014. The filing is unaudited. The registrant describes itself as a clinical-stage RNA-interference therapeutics developer; its lead candidate was ARC-520 for chronic hepatitis B, followed by ARC-AAT for alpha-1 antitrypsin deficiency.
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Prior-year comparable period |
|---|---|---|
| Revenue | $170,750 | $43,750 |
| Operating expenses | $25.29 million | $7.05 million |
| Operating loss | $25.12 million | $7.01 million |
| Net loss attributable to Arrowhead | $22.58 million | $10.63 million |
| Loss per share, basic and diluted | $0.41 | $0.28 |
| Operating cash flow | $(24.20) million | $(7.02) million |
| Cash at period end | $103.99 million | $59.71 million |
Research and development expense was $17.74 million, up from $3.13 million. The company attributed the increase primarily to clinical-supply manufacturing, toxicology work and clinical-trial preparation. Revenue remained immaterial relative to operating costs.
At December 31, cash and cash equivalents were $103.99 million; short- and long-term held-to-maturity bonds totaled $41.34 million at amortized cost ($40.76 million fair value). Total assets were $162.14 million. Current liabilities were $11.50 million; total liabilities were approximately $16.43 million, including $0.92 million of capital lease obligations and $3.97 million of contingent consideration. Notes payable were zero at quarter-end. No dividends were reported.
Cash declined $28.52 million during the quarter. Investing activities used $4.50 million, including $7.00 million of other investing outflows, partly offset by $3.05 million of bond maturities. Financing provided $0.18 million, mainly from warrant and option exercises. The filing reports no off-balance-sheet arrangements.
Material changes and unusual items
- Compared with the prior-year quarter, operating expenses rose substantially and net loss more than doubled, principally reflecting expanded development activity.
- Other income was $2.54 million versus expense of $3.68 million a year earlier. A $2.38 million noncash gain from remeasurement of derivative liabilities was a major contributor; the comparable period included a $3.52 million noncash loss.
- Stock-based compensation increased to $2.01 million from $0.52 million. Weighted-average shares increased to 54.69 million from 37.74 million.
- Cash and cash equivalents fell from $132.51 million at September 30, 2014, while total assets declined from $182.82 million.
Outlook, risks and contingencies
- Management said available financial resources were expected to fund operations for at least the next twelve months. It also expected significant cash investment in research, development, manufacturing and clinical trials in fiscal 2015 and beyond.
- ARC-520 Phase 2a studies continued; the company reported no dose-limiting toxicities or serious adverse events observed to date. After FDA feedback on its application for Phase 2b, management expected to adjust the protocol before starting the study. Additional Phase 2b filings in Asia and Europe were expected in fiscal 2015.
- The company expected to begin an ARC-AAT Phase 1 trial soon. Timing and outcomes remain subject to clinical, regulatory and manufacturing uncertainties; the filing gives no quantified financial guidance.
- Future purchase commitments for drug manufacturing, toxicology and clinical studies were approximately $43.1 million, including $31.6 million expected in the remainder of fiscal 2015. Technology-license milestones could reach the mid-to-upper tens of millions of dollars; certain product royalties could be mid-to-high single-digit percentages.
- Two securities class actions and three putative derivative actions concerning public statements about hepatitis B research were pending, as was a Rice University license-related complaint. Damages were unspecified. The company recorded no liability and said it did not expect a material financial-statement effect; outcomes are uncertain.
- The filing said there had been no material changes to the risk factors in the fiscal 2014 Form 10-K. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Clinical and regulatory progress, protocol revisions and trial start dates for ARC-520 and ARC-AAT.
- Cash burn, bond liquidity and whether management’s stated minimum twelve-month funding outlook remains supportable as development spending rises.
- Actual timing and amounts of the $43.1 million purchase commitments and potential license milestones and royalties.
- Developments and potential financial consequences of the pending securities, derivative and Rice University litigation.
- Potential dilution: 54,715,714 common shares were outstanding at quarter-end; preferred shares were convertible into approximately 3.99 million common shares, in addition to outstanding equity awards and warrants.
- The filing reports 54,792,649 common shares outstanding as of February 5, 2015; reconcile this subsequent count with the quarter-end share count and other potential dilution.