Arrowhead Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018; compared with the three months ended December 31, 2017. Unaudited results. Arrowhead develops RNAi medicines and had no commercial drug sales; revenue came from licensing and collaboration arrangements.
Key financial results
| Metric | Quarter ended Dec. 31, 2018 | Quarter ended Dec. 31, 2017 |
|---|---|---|
| Revenue | $34.7 million | $3.5 million |
| Research and development expense | $17.6 million | $12.9 million |
| General and administrative expense | $6.1 million | $4.4 million |
| Operating income (loss) | $10.9 million | $(13.8) million |
| Net income (loss) | $12.0 million | $(13.2) million |
| Diluted earnings (loss) per share | $0.13 | $(0.18) |
| Cash provided by (used in) operating activities | $168.3 million | $(14.7) million |
Revenue growth and the return to profitability primarily reflected recognition of approximately $34.7 million under the new Janssen/JJDC arrangements, rather than product sales. Operating and net margins were approximately 31.6% and 34.7%, respectively, in the quarter. R&D expense increased 36%, driven principally by drug manufacturing, clinical trials, and toxicology work; G&A expense increased 39%.
Financial position and liquidity
- At December 31, 2018, cash and cash equivalents were $189.8 million, short-term investments $54.0 million, and long-term investments $59.6 million; total cash and investments were approximately $303.3 million. Total assets were $340.9 million.
- Current liabilities were $134.6 million, including $124.9 million of deferred revenue. Long-term liabilities were $34.8 million, including $33.2 million of deferred revenue. Stockholders’ equity totaled $171.5 million.
- The company paid off its remaining $2.3 million research-facility note payable in October 2018; no note payable remained at quarter-end. Lease commitments and other contractual obligations remain.
- Operating cash flow included substantial collaboration-related receipts and deferred revenue. Investing activities used $67.8 million, primarily for purchases of fixed-income investments; financing activities provided $59.1 million, principally from the JJDC share issuance, net of debt repayment and other items.
- Management said available financial resources were expected to fund operations for at least the next 12 months. This is not a projection of profitability or a guarantee that funding will be sufficient beyond that period.
Material changes and business developments
- In October 2018, Janssen licensed ARO-HBV and agreed to fund research and preclinical work on up to three additional targets, with options to license resulting candidates. Arrowhead received a $175 million upfront payment. Johnson & Johnson Innovation-JJDC separately invested $75 million for 3,260,869 shares at $23 per share.
- The company reported a total initial transaction price of approximately $197.8 million for the ARO-HBV license and related services, including the upfront payment, the premium on JJDC’s equity investment, and estimated drug-material payments. Revenue is recognized over time based on progress toward completing the combined performance obligation. At quarter-end, $158.1 million remained recorded as deferred revenue and $3.2 million as accounts receivable.
- Potential future Janssen payments include up to $1.6 billion in development and sales milestones for ARO-HBV and up to $1.9 billion in milestones for the additional targets, plus royalties. These amounts are contingent, not assured revenue.
- Arrowhead filed a CTA for ARO-ANG3 in December 2018 and one for ARO-APOC3 in January 2019; dosing had commenced for ARO-ANG3. CTA or equivalent filings for ARO-ENaC and ARO-HIF2 were planned for 2019. Amgen was advancing ARO-LPA in Phase 1.
- Common shares outstanding were 92.6 million at December 31, 2018 and 94.2 million at February 6, 2019. The JJDC issuance increased the share count; dilution may also arise from equity awards.
Outlook, risks, and contingencies
- Management expects R&D spending to rise as more candidates enter and progress through clinical trials. Drug manufacturing, clinical trial, and toxicology costs were already higher year over year.
- As of December 31, 2018, estimated purchase commitments for drug manufacturing, toxicology, and clinical studies were approximately $34.0 million, of which about $25.0 million was expected in fiscal 2019. Third-party technology license milestones could reach the mid- to upper-double-digit millions, with potential royalties on product sales.
- In January 2019, Arrowhead amended its Madison, Wisconsin facility lease to add 13,000 square feet and extend the lease through September 2029; occupancy of the added space was expected in mid-to-late 2019. Future minimum operating lease payments disclosed at quarter-end totaled $8.9 million before this amendment.
- The filing describes securities and derivative lawsuits. No liability was recorded; the company said it could not predict the outcome or estimate potential liability for one pending matter. It reported no material change to the risk factors in its prior annual report.
- Clinical and regulatory progress is uncertain. The filing cautions that actual results may differ materially from forward-looking statements. Adoption of the new revenue standard had no material reported impact; the company expected the forthcoming lease accounting standard to materially affect lease classification and disclosures.
Important facts for investors to verify
- How quickly the $158.1 million deferred revenue balance will be recognized, and the assumptions behind labor-hour progress estimates and transaction-price allocation.
- Whether Janssen exercises options on additional targets and whether contingent milestones or royalties are achieved; do not treat announced maximum milestone amounts as committed funding.
- Clinical, regulatory, and manufacturing progress for ARO-HBV, ARO-AAT, ARO-ANG3, ARO-APOC3, and other pipeline candidates, alongside the expected increase in development spending.
- Cash burn excluding large, nonrecurring collaboration and equity-related inflows, and the effect of future share issuance and equity awards on dilution.
- Updates on pending litigation, purchase commitments, facility expansion costs, and lease obligations.