Arrowhead Research Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended December 31, 2012; comparative period is the three months ended December 31, 2011. The filing identifies the registrant as Arrowhead Research Corporation, although the request metadata names Arrowhead Pharmaceuticals, Inc.
Business context
Arrowhead was a development-stage, clinical-stage therapeutics company focused on RNA interference (RNAi) and targeted drug delivery, with programs including oncology, obesity and chronic hepatitis B (HBV). Management highlighted ARC-520, its HBV candidate: internal preclinical requirements were complete and final IND-enabling work, including manufacturing and toxicology, had begun.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2012 | Quarter ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $159,000 | $24,000 |
| Operating expenses | $4.97 million | $4.06 million |
| Operating loss | $4.81 million | $4.04 million |
| Net loss | $4.78 million | $2.69 million |
| Net loss attributable to Arrowhead | $4.61 million | $2.49 million |
| Basic and diluted loss per share | $0.33 | $0.25 |
| Cash used in continuing operating activities | $3.84 million | $2.71 million |
| Cash at period end | $2.93 million | $6.77 million |
Revenue remained small relative to expenses, so the filing does not present a meaningful operating margin. R&D expense increased to $1.58 million from $0.77 million, principally reflecting HBV preclinical work and a full quarter of activity at the Madison research facility. Cash fell $446,000 during the quarter; financing provided $3.28 million, mainly from stock and warrant issuance, while investing provided $112,000.
At December 31, 2012, total assets were $15.23 million, current assets $6.06 million and current liabilities $6.08 million. Stockholders’ equity was $7.60 million. Notes payable totaled about $985,000, and capital lease obligations totaled about $1.44 million. Derivative liabilities were $1.49 million. The company reported an accumulated deficit of approximately $140 million.
Changes, financing and unusual items
- Compared with the prior-year quarter, revenue rose but remained immaterial to operating costs; net loss attributable to Arrowhead increased to $4.61 million from $2.49 million.
- Operating expenses rose about 22%. R&D more than doubled; salaries and payroll-related costs rose 23%. General and administrative expense declined 28%, largely because prior-year acquisition-related professional fees did not recur.
- Other income fell to $29,000 from $1.35 million. The prior-year period included a $1.58 million noncash gain on the Roche Madison acquisition. Current-period derivative remeasurement included noncash gains and losses.
- December 2012’s public offering generated approximately $3.6 million net proceeds, including a $500,000 promissory note due February 1, 2013. In January 2013, a further offering raised approximately $3.3 million net. These equity and warrant issuances increased dilution risk. The company also had a $15 million equity-line facility, subject to conditions including a minimum share-price requirement; it had drawn $1 million by quarter end.
- In January 2013, Arrowhead agreed to sell its $2.5 million Wisepower note receivable for Wisepower shares, with total consideration expected to be approximately $2.5 million. The filing reports that approximately $1.6 million of shares had been received and further shares were due in March.
Outlook, risks and contingencies
The company gave no quantified financial guidance. Management expected significant cash investment to continue and stated that further equity financings, asset sales and/or licensing or collaboration arrangements would be needed to fund operations. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. If financing is unavailable on acceptable terms, Arrowhead may need to delay, reduce or discontinue development, dispose of product or technology rights, or cease operations.
Key business risks include clinical and regulatory uncertainty, product commercialization, dependence on external funding and collaborations, and potential dilution. Roche has negotiation rights on certain candidates and may receive milestone payments and royalties; acquisitions also carry contingent milestone obligations. Operating lease commitments were $2.56 million, in addition to capital lease commitments. The company reported no material litigation, no material change to the risk factors in its latest annual report, and effective disclosure controls.
Investor verification priorities
- Confirm current cash, burn rate and runway, including use of proceeds from the January 2013 offering and the status of the Wisepower note sale.
- Verify ARC-520’s IND-enabling, manufacturing and clinical-trial milestones, timing and associated costs.
- Review the terms and potential dilution from outstanding warrants, the equity-line facility and subsequent stock issuances.
- Assess the company’s ability to secure funding or partnerships and the implications of the going-concern uncertainty.
- Reconcile the MD&A’s stated Arrowhead-attributable loss of $4.59 million with the financial statements’ reported $4.61 million; the filing text does not explain the difference.