Arrowhead Research Corporation (now identified in request as Arrowhead Pharmaceuticals) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2015; comparative periods ended June 30, 2014. The filing names the registrant as Arrowhead Research Corporation.
Business context and reporting period
Arrowhead is a clinical-stage RNA interference therapeutics developer. Its lead candidate, ARC-520, targets chronic hepatitis B; ARC-AAT targets alpha-1 antitrypsin deficiency. The company reported no product-scale commercial revenue and continued to fund research, manufacturing, and clinical development.
Financial performance and liquidity
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $0.124 million | $0.338 million | $0.044 million and $0.131 million, respectively |
| Operating loss | $15.994 million | $70.744 million | $12.700 million and $30.922 million |
| Net loss attributable to Arrowhead | $15.936 million | $67.198 million | $11.629 million and $36.200 million |
| Basic and diluted loss per share | $0.27 | $1.19 | $0.22 and $0.81 |
| Operating cash used | Not separately presented | $53.687 million | $24.497 million |
For the nine-month period, operating expenses were $71.1 million, including $36.9 million of R&D (up from $14.7 million) and $10.1 million of acquired in-process R&D related to the Novartis asset purchase. Clinical trial and drug-manufacturing costs rose substantially. Revenue remained immaterial relative to development spending; the filing does not present a meaningful positive operating margin.
At June 30, 2015, cash and cash equivalents were $87.3 million and investments were $24.4 million, versus $132.5 million and $44.7 million at September 30, 2014. Total assets were $145.2 million; current liabilities were $9.5 million and working capital was approximately $105.2 million. The company reported $0.8 million of capital lease obligations, no notes payable, $1.7 million of derivative liabilities, and $4.0 million of contingent consideration. Management said available resources were expected to fund operations for at least the next 12 months.
Cash decreased $45.3 million over the nine months: $53.7 million used in operations was partly offset by $19.4 million of investment maturities and other cash flows; investing cash flow was a net inflow of $8.3 million, including the $10.0 million cash payment for Novartis assets. Financing provided $0.2 million, mainly from warrant and option exercises. The prior-year period included $172.6 million of equity-financing proceeds.
Material changes versus the prior comparable period
- Nine-month operating loss more than doubled, primarily reflecting expanded clinical development, manufacturing and research activity, as well as the $10.1 million Novartis acquired-R&D charge.
- Nine-month net loss increased to $67.2 million from $36.2 million, although the comparison was affected by noncash derivative remeasurement: 2015 recorded a $2.4 million gain, while 2014 recorded a $5.7 million loss.
- Cash and investments declined as the company funded operations and the Novartis transaction; the prior-year cash position had been bolstered by large equity offerings.
- Common shares outstanding increased to 59.5 million from 54.7 million at September 30, 2014. The Novartis acquisition included 3.32 million shares valued at $25.0 million.
Outlook, commentary, risks and unusual items
- Management expected clinical-trial expenses to increase as enrollment advanced. The ARC-520 Phase 2b U.S. application was approved in April 2015; Germany cleared two additional Phase 2b studies in June. The company said it expected to seek additional Asian and European clearances.
- Healthy-volunteer dosing in the ARC-AAT Phase 1 study was completed in May; patient dosing began in July 2015. ARC-AAT received FDA orphan-drug designation in June.
- The March 2015 Novartis transaction covered RNAi patents and licenses and three preclinical candidates. Consideration included $10 million cash and $25 million in shares, plus potential development and sales milestones and royalties. Disclosed milestones could reach the mid-to-upper double-digit millions; product royalties generally range from low to mid-single digits under specified terms.
- Approximately $51 million of purchase commitments remained at June 30, 2015, including about $13 million expected in the remainder of fiscal 2015. Additional license milestone and royalty obligations may arise.
- Seven securities and stockholder derivative actions relating to statements about hepatitis B research were pending, as was a separate Rice University lawsuit concerning a former subsidiary’s license agreement. The company said it intended to defend the matters and had recorded no liability, stating it did not expect a material financial-statement effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change to previously disclosed risk factors or market-risk exposure.
Most important facts for investors to verify
- Cash burn and the stated 12-month liquidity runway against the $51 million of purchase commitments and planned clinical-trial spending.
- ARC-520 and ARC-AAT trial progress, regulatory clearances, safety findings, and resulting development costs.
- Potential dilution from outstanding options, warrants, restricted stock units and convertible preferred stock; 15,652 preferred shares were outstanding and convertible into approximately 2.67 million common shares, subject to ownership limits.
- Novartis milestone and royalty terms, and whether the acquired assets produce viable clinical candidates.
- Developments in the pending litigation and any change to the company’s assessment of potential exposure.