Investment in Subsidiaries

9 Months Ended

Jun. 30, 2012

Investment in Subsidiaries [Abstract]

INVESTMENT IN SUBSIDIARIES

NOTE 3. INVESTMENT IN SUBSIDIARIES

In addition to 100% ownership interest in Arrowhead Madison, Inc. and Alvos Therapeutics, Inc., Arrowhead also maintains majority ownership in Calando Pharmaceuticals, Ablaris Therapeutics, Inc., and minority investments in Nanotope, Inc. and Leonardo Biosystems, Inc.

Calando Pharmaceuticals, Inc. (formerly known as Insert Therapeutics, Inc. “Insert”)

Calando is a clinical stage RNAi therapeutics company. On April 17, 2008, Calando merged with and into Insert, with Insert as the surviving company. Prior to the merger, Arrowhead invested an aggregate of $23.2 million in Calando through equity and debt financings. As a condition of the merger, the Preferred Stock of each of Calando and Insert was converted into common stock and the loans were converted to equity. As a result of the merger, shares of Insert common stock were issued to the stockholders of the former Calando, and Insert changed its name to Calando Pharmaceuticals, Inc.

On November 26, 2008, Calando entered into Unsecured Convertible Promissory Note Agreements (“Notes”) for $2.5 million with accredited investors and Arrowhead, which invested $200,000 in the Notes offering. Arrowhead subsequently invested an additional $600,000 in the same offering. Except for one Note in the principal amount of $500,000, all Notes and accrued interest were converted into a total of 2,950 shares of Calando Series A Preferred Stock on June 23, 2009. The remaining Note is due November 26, 2013; see Note 4 for further information.

In fiscal 2010, Arrowhead issued 122,000 shares of its Common Stock in exchange for shares of Calando common stock, with several minority stockholders of Calando. In conjunction with this exchange, Arrowhead also issued 26,400 warrants to purchase Arrowhead Common Stock in exchange for warrants to purchase Calando common stock.

In January 2011, Arrowhead invested $9.1 million, through a cash investment of $1.0 million and the conversion of $8.1 million intercompany debt, acquiring newly issued Calando Series B and Series C preferred stock.

As of June 30, 2012, Calando owed to Arrowhead $2,573,403 under a series of 10% simple interest notes and advances. It is expected that these loans will either be repaid or converted to equity in the future. The balance of the notes and advances is eliminated in consolidation.

As of June 30, 2012, Arrowhead owned 79% of the outstanding shares of Calando and 76% on a fully diluted basis.

Ablaris Therapeutics, Inc.

Ablaris was formed and began operations in the first quarter of fiscal 2011, based on the license of certain anti-obesity technology developed at the MD Anderson Cancer Center at the University of Texas. During the year ended September 30, 2011, Ablaris raised $2.9 million in cash, of which $1.3 million was invested by Arrowhead and $1.6 million was invested by outside investors, through the issuance of Series A Preferred stock.

As of June 30, 2012, Arrowhead owned 64% of the outstanding shares of Ablaris and 64% on a fully diluted basis.

Nanotope, Inc.

Nanotope’s primary areas of focus include treatment of spinal cord injuries, cartilage regeneration and wound healing. As of June 30, 2012, Arrowhead owned 23% of the outstanding shares of Nanotope, and 19% on a fully diluted basis. Arrowhead accounts for its investment in Nanotope using the equity method of accounting.

During the quarter ended June 30, 2012, Nanotope moved its R&D operations from its facility in Skokie, Illinois to the laboratories of Northwestern University under the direction of Dr. Samuel Stupp, the company’s founder. Development work will be performed by personnel in Dr. Stupp’s lab, and the Nanotope terminated the employment of its staff. The company’s research equipment was sold to Arrowhead, to be utilized at its research facility in Madison, Wisconsin. Nanotope’s intellectual property portfolio continues to be maintained, potentially allowing Nanotope to benefit from successful developments. These circumstances required Arrowhead to examine its investment in Nanotope, as well as its receivable from Nanotope, for impairment. Upon review, it was determined that the remaining book value of its investment exceeded its fair value as determined by discounted future cash flows. As a result, upon completion of the assessment, management recorded a non-cash impairment charge of $1.4 million during the quarter ended June 30, 2012 to reduce the carrying value of the investment to $0. Additionally, the company recorded a full reserve against its receivable from Nanotope in the amount of $1.9 million.

Summarized financial information for Nanotope, Inc. is as follows:

	June 30, 2012			September 30, 2011
Current assets	$	66,000		$	21,000
Non-current assets		11,000			85,000
Liabilities		2,084,000			1,255,000
Equity		(2,007,000	)		(1,149,000	)

	For the three months ended June 30, 2012			For the three months ended June 30, 2011			For the nine months ended June 30, 2012			For the nine months ended June 30, 2011
Revenue	$	0		$	3,000		$	0		$	515,000
Operating expenses		109,000			283,000			801,000			896,000
Net loss		(115,000	)		(306,000	)		(858,000	)		(419,000	)

	For the nine  months ended June 30, 2012			For the nine  months ended June 30, 2011
Cash flows used in operating activities	$	(765,000	)	$	(427,000	)
Cash flows provided by (used in) investing activities		61,000			(28,000	)
Cash flows provided by financing activities		753,000			628,000

Leonardo Biosystems, Inc.

Leonardo is developing a drug-delivery platform technology based on novel methods of designing porous silicon microparticles that selectively accumulate in tumor vasculature. Arrowhead accounts for its investment in Leonardo using the cost method of accounting. As of June 30, 2012, Leonardo owed to Arrowhead $420,000, included in other receivables, which is expected to be repaid or converted to equity. As of June 30, 2012, Arrowhead’s ownership interest in Leonardo was 5%.