Arrowhead Research Corporation Initiation Note

Arrowhead Research Corporation Initiation note

Improving focus Pharma & biotech

The 2011 acquisition of Roche’s RNAi (RNA interference) business makes Arrowhead 15 August 2012 one of the leaders in RNAi and delivery solutions for RNAi. The recent acquisition of Price $2.70 Alvos Therapeutics adds a library of homing peptides, also aimed at developing Market cap $36m targeted therapeutics, with or without the use of RNAi. This will speed up development of new projects both for partnering and in-house development. The most advanced projects in-house are a first-in-class obesity compound and an RNAi Shares in issue 13.5m compound for solid tumours (both Phase I), valued at $60m. The value of the platform Free float 93% technology is not included in this figure. Code ARWR

Primary exchange NASDAQ

Year end Revenue PBT* EPS* DPS P/E Yield ($m) ($m) (c) (c) (x) (%) Share price performance 09/10 0.0 (0.24) (44.9) 0.0 N/A N/A 09/11 0.3 (7.4) (29.4) 0.0 N/A N/A 09/12e 0.1 (19.8) (165.7) 0.0 N/A N/A 09/13e 0.1 (17.3) (128.1) 0.0 N/A N/A Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptional items.

Platform technology potential

The recent Alvos acquisition for c $2m in shares transforms Arrowhead into a % 1m 3m 12m powerful platform company for targeted delivery, making it an attractive development Abs (20.7) (44.2) (41.2) partner. This should accelerate near-term licensing deals as seen already by the Rel (local) (23.3) (46.8) (50.6) recent Merck agreement to evaluate an antibody candidate acquired through Alvos. 52-week high/low $7.50 $2.70

Turning point in pipeline valuation Business description

Arrowhead has a strong position in RNAi delivery and now has early clinical data on Arrowhead Research Corporation is a CALAA-01 in solid tumours, showing a positive response in humans. Key Phase I data nanomedicine company with clinical on CALAA-01 is due in the latter part of 2012. A Phase I trial on Adipotide in obesity programmes in two distinct areas, small RNA therapeutics and obesity. It also has recently began with results due mid-2013. Arrowhead expects to file an IND for ARC- developed or acquired various platform 520 in Hepatitis B also by mid-2013 and conduct a Phase I trial leading to early proof technologies for RNAi delivery (Roche) and of concept. Each of these events could add to the baseline valuation. peptide targeting (Alvos).

Next events Financing available Phase Ib data CALAA-01 Mid 2012 Theoretically RNAi offers the potential to treat the untreatable by getting into cells and Bring two further candidates 2012 switching off disease-causing genes, but experience is limited and projects are high to clinic Partnering project with risk. Arrowhead has cash and equity credit lines of $22m, sufficient funding for the 2012 Alnylam next 18 months at the current cash burn rate, ignoring any further disposals or Phase I data Adipotide Mid 2013 revenue generation from licensing deals, which is highly possible. Analysts Valuation: Look into the abyss Andrew Fellows +44(0)20 3077 5700 Robin Davison +44(0)20 3077 5737 The current EV of $33m is well below our $60m rNPV of the two lead projects, [email protected] adjusted for minorities ($94m should Arrowhead gain 100% control of Calando and

Ablaris). The platform technologies and earlier-stage pipeline represent pure upside.

Arrowhead Research Corporation is a research client of Edison Investment Research Limited

Arrowhead Research Corporation | 15 August 2012

Investment summary: Improving focus

Company description: Gene silencing and targeted therapies Arrowhead Research Corporation is a US-based nanobiotechnology company, headquartered in Pasadena, CA, with research facilities in Madison, WI, employing 51 people. It listed in 2005 on NASDAQ. Arrowhead has two differentiated nanoparticle delivery systems (Exhibit 4) that underpin its RNAi pipeline, and a homing peptide platform acquired with Alvos Therapeutics.

Exhibit 1: Arrowhead subsidiaries

Subsidiary Comment Arrowhead Madison Wholly-owned. Acquired from Roche in 2011. Includes a world-class research facility, staff, RNAi IP and delivery technology DPC (Dynamic PolyConjugates). Calando Majority held (79%). Delivery of small RNAs for gene silencing using RONDEL system. Lead asset, CALAA-01 is in Pharmaceuticals a Phase I solid tumour trial, and is the first RNAi therapeutic shown to systemically deliver siRNA in humans. Ablaris Therapeutics Majority held (64%). Anti-obesity therapy company. Lead product, adipotide entered the clinic in July 2012. Based on technology developed at MD Anderson (peptide targets and ablates blood vessels supplying white fat tissue). Nanotope Minority holding (23%). Regenerative medicine. Leonardo Biosciences Minority holding (5%). Next-generation drug delivery initially targeting cancer. Source: Edison Investment Research

Valuation: Platform potential Following the acquisition of Alvos Therapeutics, Arrowhead’s focus is on targeted therapeutics using its platform technology. A large library of targeted peptides and proprietary siRNA delivery vehicles puts Arrowhead in a strong competitive position for licensing deals. Our rNPV valuation of the two lead compounds, CALAA-01 (solid tumours) and Adipotide (obesity) is $60m, not assigning any value to the platform technology. Broadening the library of targeted peptides will accelerate new licensing deals, as witnessed by the announcement of an evaluation deal with Merck on an antibody in the Alvos portfolio.

Sensitivities: Delivery and immunogenicity Specific challenges facing RNAi therapeutics are delivery to target tissues and immunogenicity. RNAi is a relatively new technology; thus clinical trial outcomes can lead to large variations in potential value. Partnering issues: Deal timing is a balance between needing funding but at the same time retaining as much ownership as possible. The smaller nanotechnology system, DPC, appears to show a unique advantage. Library extension as seen through the Alvos deal raises the prospect of partnering deals. Big pharma presence: Various large pharmas expressed interest in RNAi and some invested heavily without fully evaluating the issues. Some of these players have now exited, but if the field continues to show success, they may chose to re-enter the field once again via companies such as Arrowhead.

Financials: Good uses for cash The monthly cash burn is $1.5m taking into account operating costs from Arrowhead Madison, with cash of $3.3m as of June 2012. A further $6.2m has recently been raised from issuance of shares. Near-term ambitions include conclusion of CALAA-01’s Phase Ib trial, and bringing two internal RNAi candidates into the clinic (HBV and Hif 2alpha). Arrowhead has a $15m three-year equity credit line with Lincoln Park Capital ($14m remains). New licensing deals could generate additional revenue (likely in the next couple of years); our current forecasts are more conservative.

Arrowhead Research Corporation | 15 August 2012

Outlook: Novel ways of treating disease

Arrowhead is a nanomedicine company developing targeted therapeutics around its clinical development programmes in two distinct areas: small RNAis (oncology and infectious disease) and obesity. Following last year’s purchase of Roche’s RNAi business, Arrowhead now offers a broad range of delivery solutions for silencing RNA (siRNA) making the company an attractive development partner. RNAi-based therapeutics have the potential to shut down specific disease-causing genes.

Arrowhead’s main strategy is creating platforms on which multiple products can be based, either for internal use or external licensing. The acquisition of Roche’s RNAi therapeutics business in 2011 (cost $7-9m in Arrowhead equity plus milestones and low single digit royalties on sales) gave the company a much stronger competitive position in RNA silencing. This purchase included all related IP, development programmes and a research facility in Madison, Wisconsin. The more recent acquisition of Alvos Therapeutics adds an extensive library of human-derived homing peptides to be used as targeting agents, linked to siRNA delivery vehicles and small molecules. Arrowhead will use this to develop targeted peptide-drug conjugates (PDCs), with at least two collaborations expected by Q113; its evaluation agreement with Merck & Co, to assess a novel proprietary antibody against an undisclosed target is the first of these. Alvos licensed this technology from the MD Anderson Cancer Center (MDACC), which had achieved proof of concept in targeting metastatic prostate cancer with one sequence.

Arrowhead’s RNAi delivery technologies form the foundation of its current R&D pipeline (Exhibit 2), although these technologies are not yet ascribed any valuation. The key technologies are: DPC (dynamic polyconjugates), which show a benefit over larger lipid-based systems; RONDEL, a very flexible delivery system optimised for oncology; and proprietary LNP (liposome nanoparticle). Arrowhead’s current valuation is supported by its lead clinical programmes: CALAA-01, a cancer candidate based on silencing RNA using the RONDEL delivery platform; and Adipotide, an anti-obesity peptide with a novel mechanism of action that selectively destroys the blood supply to white adipose tissue. Phase I safety data on CALAA-01 is due in the latter part of 2012, potentially addressing kidney toxicity and immune response issues, and allowing progression into a Phase II trial in solid tumours. With Adipotide, Arrowhead is enrolling a Phase I trial, funded by MD Anderson in Houston (licensor of the technology). Other internal RNAi development programmes targeting Hif 2alpha for solid tumours and the Hepatitis B virus, and the potential for generating new development candidates and securing collaborations could represent further upside.

Exhibit 2: Arrowhead R&D pipeline

Programme (platform) Stage (indication) Comment CALAA-01 (RONDEL) Phase Ib (cancer) Internal (Calando). 36-pt Phase I solid tumour trial ongoing (results: Q312); Phase Ib expected to complete in 2012. Transferrin is the targeting agent. Adipotide / Prohibitin TP- Phase I (obesity) Internal (Ablaris in conjunction with MD Anderson). Unique mechanism of action 01 (fat homing peptides) targeting blood supply of fat cells. 39-pt Phase I trial (funded by MD Anderson) in obese prostate cancer pts due to initiate spring 2012, evaluating up to 5 dose levels (n=3 at each level). Hif 2alpha (RONDEL) Preclinical (cancer) Internal. Focus on renal cell carcinoma and genotypes subset. ARC-520 (DPC) Preclinical (hep B) Internal. IND in Q213. DPC delivery has shown good results in liver tissue to date. CRLX-101 (Cyclosert) Phase II (NSCLC) Cerulean Pharma is exclusive global licensee (signed 2009), Calando received undisclosed upfront payment, and is eligible for development/sales milestones and sales royalties. Nanoparticle formulation of camptothecin (potential for improved tolerability). Phase I demonstrated favourable safety profile (data at EORTC-NCI- AACR 2010).148-pt NSCLC Phase II ongoing (results: April 2013). Tubulin Inhibitor (Cyclosert) Preclinical (cancer) Partnered with Tube Pharmaceuticals. Source: Edison Investment Research, Arrowhead

Arrowhead Research Corporation | 15 August 2012

What is RNAi and what is its potential?

Exhibit 3: RNAi primer What is RNAi? RNA interference (RNAi) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a particular protein. The scientists who discovered RNAi were awarded the Nobel Prize in 2006. Mediated by small interfering RNAs (siRNA), a class of ribonucleic acid molecules, RNAi- based therapeutics can leverage the natural pathway of gene silencing to potentially target and shut down specific disease causing genes. What is the promise of Traditional drug technologies can only address a limited number of the genetically-defined potential drug RNAi? targets, such as extracellular proteins and certain classes of enzymes. Small molecules that recognize and bind proteins can, eg, often only be found for the limited number of proteins that naturally bind small molecules (metabolites, co-factors, etc.) to carry out their physiological functions, while the large monoclonal antibodies cannot access the majority of intracellular proteins. An alternative method of treating patients is to lower the activity of a certain protein by preventing its production in the first place. This can be achieved with two similar approaches: antisense RNA or interference RNA (RNAi). What does RNAi Targeting biological pathways to treat disease is a powerful approach, since these pathways are highly target? efficient at carrying out their functions in the body. The RNAi pathway is present in all human cells and operates as a sequence-specific gene silencing mechanism triggered by the presence of double-stranded RNA (dsRNA); potentially a natural defence mechanism against some viruses. In 2001, Tuschl discovered that short versions of dsRNA, known as siRNAs, could be used to trigger RNAi. Mechanism of RNA interference

How does antisense Antisense RNA (left-hand diagram below) consists of a nucleotide strand which uses antisense or RNA differ from RNAi? complementary sequence binding to mRNA to physically inhibit translation into protein at the ribosome. RNAi (right-hand diagram) also uses antisense technology; but with RNAi, in the cell the siRNA attaches to the RISC protein aggregate, which unwinds the siRNA into a single RNA strand that can then binds to and degrades the target mRNA. Antisense RNA is further advanced with one marketed drug (Isis’s fomivirsen [Vitravene] for cytomegalovirus), one which has completed Phase III (Isis/Genzyme’s mipomersen for high cholesterol) with several in late stage development.

What are the These include chemical stability of siRNA, avoidance of off-target effects, RNAi triggers that do not stimulate challenges of RNAi? immune responses and RNAi delivery. While most can be solved through nucleic acid chemistry, delivery is an area where companies like Arrowhead are making significant advances. Naked siRNA has poor pharmacological properties after systemic administration, including poor circulation times in the bloodstream and rapid clearance, leaving very little siRNA available for uptake into target tissues. How much interest Given the potential of RNAi therapeutics, investment in RNAi since 2006 is around $3bn to date. This includes has there been in the Merck’s $1.1bn acquisition of Sirna Therapeutics (2006), $700m in realised partnership funding Alnylam has field? received for its IP, Pfizer’s $164m acquisition of Coley Pharmaceuticals (2007, remodelled into Pfizer’s RNAi development hub), and Roche’s 2008 $125m acquisition of Mirus Bio Corp (early-stage delivery technology, subsequently part of the Arrowhead’s 2011 purchase of Roche’s RNAi business). So why have some Various pharma companies (including Roche, Novartis, Pfizer and Abbott) started both internal programmes and large pharma external research collaborations into RNAi technology from 2005 onwards. They subsequently exited the field companies exited when faced with delivery problems and other issues. Successful clinical progress (followed by commercial RNAi research? success) should reignite confidence and interest in this field. Source: Edison Investment Research

Arrowhead Research Corporation | 15 August 2012

One of the key obstacles to successful development of RNAi therapeutics to date is delivery. Solutions to helping siRNA reach its target cells can be broadly split into two categories: conjugate and nanoparticle. In conjugates, a moiety is directly added to the siRNA with the aim of increasing its circulation time either through increased size or association with blood components (eg albumin or lipoproteins). In some cases, the conjugate is also intended to facilitate cellular uptake by recognising certain cell surface receptors. Conjugate-siRNAs have been successful in delivering siRNAs throughout the body, although almost all of these approaches suffer from the inability of these molecules to then cross the cellular membrane. In comparison, nanoparticle approaches have the advantage that multiple functionalities, including cellular uptake, membrane-crossing ability and triggered nanoparticle disassembly, can be engineered into them. Nanoparticle siRNA delivery has been successfully applied in preclinical animal models to knock down various genes particularly in the liver, in some tumours, and in certain cells of the immune system. There are also now some initial results in humans.

One of the first solutions was to adopt liposomes for systemic RNAi delivery. However, there is still uncertainty about their safety profile in humans (ie concerns about liver toxicity and immune stimulatory potential). In addition, most nanoparticle siRNA delivery systems are only pharmacokinetically targeted, meaning that the biodistribution of a drug can be modulated in the absence of a specific targeting ligand, eg by changing the stability of the nanoparticle. Targeted delivery through addition of cell surface receptor ligands is thought to have significant potential to enhance efficacy and safety of delivery. These challenges arise partly due to the chemical nature of nanoparticles, and partly due to the difficulty in controlling formulation of such complex particles.

Arrowhead has two differentiated nanoparticle delivery systems (Exhibit 4), which underpin its RNAi pipeline. They should also enable development of new pipeline candidates, and may also provide the potential for licensing collaborations with large- or mid-cap pharma or biotech partners seeking RNAi delivery solutions.

Exhibit 4: Arrowhead’s main RNAi delivery solutions

Platform Mechanism Benefits Notes RONDEL (RNAi Several polymer siRNA complexes self- siRNA is protected by Validated in preclinical and human oligonucleotide assemble into a nanoparticle of <100nm in cyclodextrin containing models. Optimised for oncology. nanoparticle diameter to protect from degradation in serum. polymers, which allows delivery) IV. Molecules bind to membrane receptors on it to be shuffled into the the cell surface and the RNA-containing cell cytoplasm to silence nanoparticle is taken into the cell. It then target genes. This helps unpacks the siRNA, which enters the cytoplasm to protect from immune to interact with the RNAi machinery of the cell. reactions. DPC (dynamic Developed in 2007 by Arrowhead Madison (1) Reduction of toxicity DPC is radically different from standard polyconjugate scientists (at Mirus Bio), DPC technology is by controlling when the liposomal or lipid nanoparticle siRNA siRNA delivery viral-like. Viruses are efficient at finding their membrane lytic property delivery systems used by the majority of system) target cells and delivering their nucleic acid of the polymer is companies for systemic delivery. They are payload to the correct cell compartment. Key activated; (2) Inhibition of much smaller (enabling more efficient features of viruses (and DPCs) are small size, non-specific interactions movement from the vasculature to overall negative surface charge, exquisite with blood components access the target tissue), can use specificity for particular cell types based on and non-targeted cell targeting ligands for cell-specific delivery unique cell-specific receptors, and ability to types. (yet to be achieved with lipid-based disassemble and release their cargo to the systems) and their polymer-based proper cell compartment in response to cellular modular nature allows each component triggers. to be optimised for the highest efficacy/lowest toxicity. Source: Edison Investment Research, Arrowhead

Arrowhead Research Corporation | 15 August 2012

Arrowhead clinical pipeline

Arrowhead’s current valuation is more than supported by its two lead pipeline assets, CALAA-01 (an RNAi cancer therapy) and Adipotide (a peptide-based obesity therapy). Clinical data on each of these is due in the next 12 months, CALAA-01 data is anticipated later in 2012 and data on Adipotide mid- 2013. This will provide clinical validation of both drug approaches and of the RONDEL delivery platform, and may also stimulate partnering interest. Arrowhead does not have resources to fund larger, later-stage clinical trials, so relies on its partnering ability.

RNAi programmes CALAA-01 is Calando’s lead RNAi therapeutic candidate based on RONDEL delivery. The active RNAi ingredient is an siRNA targeting ribonucleotide reductase M2, an enzyme involved in nucleotide metabolism and required for DNA replication. RRM2 is considered a promising target for cell proliferative diseases such as cancers.

Interim Phase I results were published in Nature1 from an open-label, dose escalation trial to evaluate the safety and tolerability of CALAA-01. In addition, molecular analyses were undertaken to obtain preliminary evidence for whether the drug was working in the way it was designed to. Patients with various types of solid cancers that were refractory to standard-of-care therapies received at least one cycle of four 30-minute infusions of CALAA-01 over 21 days. Depending on disease status and tolerability, some patients went on to receive further cycles of treatment.

CALAA-01 has been shown to be well tolerated in multi-dosing studies in non-human primates (NHPs), including at significantly higher doses than those reported for human patients thus far (up to 30 mg/m2 or about 0.8 mg/kg in humans vs up to 9 mg/kg in NHPs). The absence of significant immune responses in NHPs supports that RONDEL, even with unmodified siRNAs, is relatively non- immunogenic and does not function as an immune adjuvant. Overall, the preclinical safety profile raised hopes that the level at which dose-limiting toxicities start to appear might be considerably higher than the highest dose reported in Nature. This bodes well for CALAA-01’s therapeutic efficacy as it has already shown knockdown activity at this dose.

Three melanoma patients volunteered to have biopsies taken allowing for more detailed molecular analyses of the effects of CALAA-01. Through the biopsies, it was possible to confirm the dose- dependent accumulation of CALAA-01 in the melanoma cells. Before this study, no such dose- dependent accumulation had been established for any clinical RNAi therapeutic candidate. Most importantly researchers were able to isolate RNA nucleic acid material, which allowed them to unambiguously confirm that the siRNA not only accumulated in the target tissue, but was also successful in directing mRNA targets for degradation through an RNAi mechanism of action. Accordingly, RRM2 mRNA knockdown was established by quantitative real-time PCR. Moreover, the knockdown was long lasting and could still be detected after more than a month.

In summary, this data provided first-ever proof of target mRNA knockdown through an RNAi mechanism of action in man. This provides a solid basis for further clinical evaluation. The next data point expected from the CALAA-01 programme is further safety data Phase Ib trial, which will report later in 2012. The company expects that this will mitigate any concerns over dosing and potential adverse kidney toxicity and immune response side effects. Following a positive outcome of this Phase Ib trial, a larger Phase II is expected to start later in the year.

1 Davis M et al. Evidence of RNAi in humans from systemically administered siRNA via targeted nanoparticles. Nature 464, 1067-70 (15 April 2010)

Arrowhead Research Corporation | 15 August 2012

DPC (dynamic polyconjugates) technology was acquired by Arrowhead via the Roche deal last year. DPC was first developed by Mirus Bio, which was acquired by Roche for $125m in 2008. Four new generations of DPC have been subsequently developed, and initial data looks promising.

DPC results in preclinical studies have shown over 80% knock down in liver using a dose of 0.1mg/kg siRNA in rats and non-human primates, and more than 99% knock down after seven weeks with a single dose in NHP. This was achieved with a therapeutic index of more than 10 at 80% knock down showing unprecedented safety margins.

DPC is being used to develop tumour-targeting ligands. Arrowhead has a collaboration with Alnylam for a single undisclosed target, and also has an exclusive license from Alnylam for the Hepatitis B virus (HBV) target. A programme in Hepatitis B is underway (initiated by Roche) and Arrowhead expects to move this compound into clinical trials in 2013. During Q112, Arrowhead published a white paper on the effectiveness and safety of DPC, followed by a second white paper evaluating the use of RNAi in HBV therapy.

Obesity therapeutic Obesity is a large underserved target market; however, the historic lack of commercial success (due to poor efficacy, and cardiovascular or CNS side effects) means it remains a controversial area. The pharma R&D industry has so far failed to deliver a safe compound that adequately reduces calorific intake and hence leads to decent weight reduction. Many of the treatments approved to date have subsequently been withdrawn due to safety concerns, and given that approximately one-third of the population is obese in the western world, this is a growing problem. The FDA issued clear efficacy standards for obesity in 2007, but there are no strict safety guidelines, which, given the size of the potential market, and heterogeneity of the potential patient population (who often have co-morbidities) has been the focus of risk/benefit evaluations. Nevertheless, the regulatory environment appears to be shifting as the unmet need is recognised and regulators are looking at ways to balance and assess risk/benefit of novel pipeline drugs. The three lead programmes in obesity (Vivus’ Qysmia, Arena’s Belviq and Orexigen’s Contrave) all received a complete response letter following their first round regulatory reviews in 2010/11. Additional data requested by the FDA providing further insight into their safety profiles either has been, or will be, resubmitted (in the case of Contrave). Both Belviq and Qysmia were approved following second round regulatory evaluations this year.

Unlike many compounds in the field, Arrowhead’s obesity candidate is non-CNS acting. It is based on a platform technology licensed from MD Anderson in Houston, Texas. White adipose tissue is highly vascularised and both the expansion and maintenance of adipose tissue depend on a continued ability to build supporting vasculature. This technology uses an endothelial targeting peptide library that provides a map of the unique endothelial cell receptors on the vasculature that varies in different tissues. This allows for specific delivery of drug to target cells, while avoiding injury to other cells. Using this technique, peptide sequences that target endothelial receptors specific to white adipose tissue were identified.

Lead compound – Adipotide: (Prohibitin TP01) consists of two functional domains. The homing domain targets a membrane associated protein, Prohibitin, on adipose vascular endothelial cells while the membrane disrupting domain causes apoptosis by disrupting mitochondrial membranes inside the cells. A Phase I trial, designed to evaluate a single 28-day cycle of subcutaneous Adipotide in patients with castrate-resistant prostate cancer, began enrolling in July 2012. This trial will test up to five dose levels in three participants in each dose cohort, and is intended to identify the maximum tolerated dose, assess pharmacokinetics, change in weight and monitor disease progression. Data is expected to be published mid-2013.

Arrowhead Research Corporation | 15 August 2012

Initial preclinical results are very encouraging: Initial results published in Nature Medicine2 in 2004 showed obese mice losing on average 30% of their body weight in four weeks. Up-regulation of lipid turnover and increased fat metabolism were also noted as well as a reduction in the symptoms of diabetes, including improved glucose tolerance and insulin resistance.

Results of small animal studies have been confirmed in GLP-1 studies in primates. Obese monkeys treated with Adipotide showed weight loss in a time- and dose-dependent manner with only mild and reversible kidney toxicity. These results were published in November 2011 in Science Translational Medicine3 and showed that monkeys treated with Adipotide lost 7-15% of their body weight after only four weeks of treatment. In addition, Adipotide-treated animals showed marked improvements in insulin resistance (using about 60% less insulin after treatment compared to baseline), suggesting potential for use in treating Type-2 diabetes. Independent confirmation of these results has been published in the journal Diabetes4 by Dr Randy Seeley, showing treatment with Adipotide in mice completely reversed high fat diet induced obesity. Weight loss was due to a combination of fat destruction and reduced appetite. Reduction in appetite is not thought to be a direct action of the compound on the brain in the same way as amphetamines, but rather due to natural chemical interactions between the diminishing fat and the CNS.

Early weight-loss drug candidates are typically screened in rodent models of obesity. However, the central nervous system control and metabolic regulation of food intake and fat storage in rodents is quite different from that of monkeys and humans. Spontaneously obese monkeys are a more accurate model of obesity in humans and provide a valuable setting for testing anti-obesity drug candidates. Adipotide therapy resulted in a reduction in body mass, an improvement in insulin resistance, and a decrease in abdominal circumference, key predictors of diabetes in humans.

Adipotide has a number of potential benefits, in addition to weight reduction. These include its novel mechanism of action, which is distinct from the amphetamine mechanism, and is not likely to yield gastrointestinal side effects, and a lower potential for psychological effects (it does not modulate neurotransmitters).

The competitive environment for RNAi therapeutics

Since 2008 the number of RNAi therapeutics has more than doubled from eight to 18 (Exhibit 5 overleaf). Early compounds were delivered locally, eg directly into the eye. Thanks to the advent of delivery platforms such as SNALP (stable nucleic acid lipid particles) and AtuPLEX, and in future RONDEL and DPC, the number of available projects will continue to increase significantly.

As highlighted, getting siRNA to the correct target cells requires a range of different delivery systems, depending on the individual cell type being targeted and for which particular disease. For this reason many players in the field such as Alnylam are developing a broad base of delivery solutions. To dare Alnylam has developed siRNAs to more than 25 disease targets using antibodies, liposomes, peptides and conjugates as carriers. Silence Therapeutics has mainly focused on liposomal-based delivery of siRNA, also developing a range of lipid based entities according to the target tissue (AtuPLEX, DACC, DBTC). Other companies such as Benitec-Nucleonics have focused on a slightly different delivery mechanism, DNA-directed RNAi (ddRNAi). This produces double-stranded RNA inside the cell, which

2 Kolnin M et al. Reversal of obesity by targeted ablation of adipose tissue. Nature Medicine 2004: 10, 625-632. 3 Barnhart K et al. A peptidomimetic targeting white fat causes weight loss and improved insulin resistance in obese monkeys. Science Translational Medicine, 2011; 3 (108). 4 Kim D-H et al. Peptide designed to elicit apoptosis in adipose tissue endothelium reduces food intake and body weight. Diabetes April 2010: 59 (4) 907-915.

Arrowhead Research Corporation | 15 August 2012

is then cleaved into siRNA resulting in knock down. Tekmira is focused mainly on a delivery system called LNP, a liposomal based nanoparticle system. Arrowhead has three RNAi delivery technologies as we outlined previously, RONDEL, DPC (in Exhibit 4) and LNP.

Exhibit 5: Total RNAi candidates since 2008

Year Drug / Company Indication (target) Delivery Status 2004 Bevasiranib (Cand5) : Wet AMD (VEGF) Intravitreal Phase III terminated: new dosing schedules, combinations OPKO Health injection with marketed products for AMD, and enhanced delivery with novel siRNA delivery vehicles under consideration. Sirna-027 (AGN-745) : Wet AMD (VEGF) Intravitreal Discontinued after Phase II. Allergan/Sirna injection 2005 ALN-RSV01: RSV infection (viral Inhaltion of Active. Positive Phase II in experimentally infected adults Alnylam/Cubist/ RNA) siRNA and lung transplant pts. Phase IIb in the latter missed Kyowa Hakko Kirrin primary endpoint in ITT pop, but achieved stat. significance in prospectively defined analyses. Full data: ERS 2012. 2007 Qpi-1002 (DGFi) : Quark Acute kidney injury/AKI IV naked siRNA Active. 366-pt Phase II in prophylaxis of delayed graft Pharmaceuticals (p53) function in kidney transplant (results: Dec 2012). Novartis has option to exclusive worldwide licence. AKI Phase II terminated. PF-4523655 : Quark Wet AMD (RTP801) Intravitreal Active. In Phase II. Pfizer holds exclusive worldwide licence. Pharma /Pfizer injection VRX496 (rHIV) : VIRxSYS HIV (viral RNA) Lentiviral In Phase II trials. Seeking partner for further development. TD101 : Pachyonychia Pachyonychia Intradermal Phase I completed. Congenita Project congenital (mutant needle keratin) 2008 Vaccine : Duke Metastatic melanoma Electroporation Active. Phase I. University (immunoproteasome) Excellair : ZaBeCor Asthma (Syk kinase) Inhalation of Active. Phase II. Pharmaceuticals uniform siRNA CALAA-01: Arrowhead Solid tumours (M2 RONDEL Active. Phase I. ribonuc reductase) ALN-VSP02 : Alnylam Liver cancer SNALP Active. Phase I (data at ASCO 2011): extension showed (VEGF/KSP) liposome disease control > six months, with one complete response. Partner sought ahead of Phase II start. 2009 Atu027 : Silence Solid tumours (PKN3) AtuPLEX Active. Phase I dose-escalation ongoing (interim data at Therapeutics lipoplex ASCO 2011; final data by mid-2012). Phase-Ib/IIa with selected chemotherapeutic regimens planned. QPI-1007 : Quark Nerve atrophy (Capase Intravitreal Active. 66-pt Phase I underway in chronic optic nerve Pharmaceuticals 2) injection atrophy (results: Dec 2013). SYL040012 : Sylentis Intraocular pressure Eye drop Active. 30-pt Phase II recruiting. (beta adrenergic receptor) TKM-ApoB : Tek mira Hypercholesteraemia SNALP Active. Phase I: selecting a new siRNA payload and (Apolipoprotein B) liposome evaluating new LNP formulations. ALN-TTR01: Alnylam Transthyretin SNALP Active. Positive Phase I data: statistically significant amyloidosis liposome reductions in serum TTR protein levels (both wild-type and (Transthyretin) mutant TTR protein) in ATTR patients. 2010 siG12D LODER : Pancreatic cancer LODER local Active. Phase I. Silenseed (mutant KRAS) drug elution TKM-PLK1 : Tekmira Solid tumours (Polo- SNALP Active. Phase I; NCI trial running in parallel using Hepatic like kinase) liposome Artery Infusion. 2011 CEQ508 : Marina Familial Adenomatous Bacterial Active. Phase I/II recruiting. Biotech Polyposis (Catenin) ALN-PCS02 : Alnylam Hypercholesteraemia SNALP Active. Positive Phase I data: 84% PCSK9 knockdown, (PCSK9) liposome 50% lower LDL cholesterol in single dose statin-free trial. TKM-EBOLA : Tekmira Ebola infection (viral SNALP 56-pt Phase I started February 2012: funded under contract RNA) liposome with US government. Source: Edison Investment Research, Arrowhead

Arrowhead Research Corporation | 15 August 2012

Arrowhead’s IP covers nucleic acid delivery, siRNA chemistry and tissue targeting. Through Ablaris Therapeutics, Arrowhead has licensed the rights to a suite of peptides that target adipose tissue vasculature and adipose tissue. The license includes rights to therapeutic, diagnostic, and research products that incorporate the licensed peptides. The patents and patent applications cover the lead peptide compounds and methods of targeted delivery to adipose tissue.

Arrowhead has licensed access to three different siRNA formats and advanced chemical modifications. This includes a license from Alnylam allowing use of siRNAs in oncology, respiratory diseases, metabolic diseases and certain liver diseases.

Complexity of IP The monopoly on intellectual property held by Alnylam in the field of RNAi triggers has weakened significantly since the Kreutzer-Limmer and Tuschl patent prosecutions. The situation is different in ddRNAi therapeutics where, following the apparent destruction of fundamental dd RNAi trigger IP as a result of the Benitec-Nucleonics conflict, Benitec managed to get its ddRNAi trigger IP reinstated. However, as the number of potential therapeutics grows, the value of the IP shrinks as alternative pathways are used.

Exhibit 6: Changes in strategic RNAi trigger IP since 2008

Patent family (rights) Potential blocking threat 2008 Present status Fire (private All dsRNA, licensor pursued broad non- Likely only useful for ex vivo delivery approach individual) exclusive licensing strategy Kreutzer-Limmer All dsRNA from 15-49bp (all useful RNAi K-L series likely to cover only unusual structures such as 15bp dsRNAs (Alnylam) triggers) held together by covalent linkage Tuschl I (Alnylam) All dsRNA 19-23bp (sweet spot of RNAi Abandoned in US; limited to irrelevant production methods Europe triggers) Tuschl II (Alnylam) All 3' overhang siRNAs from 18-24bp Europe patent still covering valuable 3' overhang feature; US patents partly issued Zamore (private RNAi triggers enhanced by seminal Broad claims issued in Europe, US claims useful, presents uncertainty to individual) thermodynamic end-stability design rule most modified RNAi triggers Graham (Benitec) ddRNAi gate-keeping US Patent rejected E-issued in US and issued in Europe with claims covering most ddRNAi approaches Source: Arrowhead

The value related to basic RNAi trigger structures in terms of market exclusivity is limited as RNAi therapeutics offers multiple IP opportunities downstream of the basic RNAi trigger structure. In contrast to RNAi triggers, a much higher proportion of the value in delivery is tied up in the form or trade secrets and know-how. Simple conjugates rely more on patent protection than difficult-to-make nanoparticles. The importance of know-how in RNAI therapeutics is exemplified by liposomal delivery where precise formulation ratios, the understanding or rational lipid design, and manufacturing know- how has been the difference between technologies that fail in rodents to those that go on into clinical studies. It is this know-how that allowed Tekmira to become a major player In RNAi therapeutics, but which Tekmira claims Alnylam, by taking advantage of its partner status and hiring former Tekmira employees, has violated several codes of conduct to enrich itself and marginalise Tekmira. This highlights the dangers of partners, where companies have to be reliant on them but where these partners can become the greatest competitor.

Sensitivities

Two particular issues have been challenging the development of RNAi therapeutics: delivery solutions and immunogenicity. Solutions to delivery are coming forward, enabling the RNAi to reach the target

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tissue in sufficient quantity and without significant breakdown prior to arriving in target tissues. As outlined earlier in this note, Arrowhead has delivered the first clinical data measuring the levels of CALAA-01 in melanoma cancer tissue. Also CALAA-01 has shown to be relatively non-immunogenic, with an absence of significant immune responses in NHP.

 Sector issues: As with any new pharmaceutical product, there are general sector-specific challenges facing the development approval of any new compound, but given the lack of experience with RNAi therapeutics, the regulators are likely to take a more hawkish stance.

 Macroeconomic issues: Start-up companies such as Arrowhead tread a fine line where financing is concerned. Market valuations fluctuate strongly according to the outcome of clinical data and the current macroeconomic environment makes potential investors more risk averse.

 Partnering issues: Arrowhead would like to retain as much ownership of each development project as possible, but given the high costs of late-stage development partnering remains the only option.

 Big pharma presence: Initially large pharma companies saw RNAi as very much as a research tool only. Suddenly that changed and a number of players invested heavily in the area, only to find new challenges and subsequently withdrew or scaled operations back. Greater financial constraints over the past three years have left companies focusing more on the quality of the science and the players that remain appear to be investing for the long term. As companies like Arrowhead find solutions to overcome the delivery and other challenges, large- and mid-cap pharma and biotech partners may become more inclined to enter into the RNAi field to gain access to new development projects. A recent deal between Merck and Alnylam shows that pharma companies are using RNAi for drug development rather than just target validation.

Valuation

Arrowhead is on the cusp of a business transformation as it seeks to maximise the potential of its platform technologies acquired through the Roche and Alvos acquisitions. The company’s strategy is to use its platform technology to develop a broader in-house pipeline of targeted therapeutics (peptide drug conjugates, PDC, and RNAi therapeutics) and to secure development partners for drug candidates generated by its targeted technology platforms.

At present, Arrowhead is a challenging company to value, both in ascribing a value to its technology platforms and the early development stage of its RNAi and obesity projects. Against this background, we base our indicative value on the risk-adjusted net present value (rNPV) valuation of the two lead clinical programmes (CALAA-01 and Adipotide), leaving the other preclinical pipeline projects and technology platforms as pure upside potential. We acknowledge that there is inherent value in Arrowhead’s platform technologies, as these can lead either to additional licensing income or to the generation of further development projects in the pipeline. However, we leave this as potential upside until this value is unlocked through a licensing deal, or additional drug candidates are generated and move into clinical studies; at which point they will be included in our pipeline rNPV.

Our base case rNPV model assumes market entry of CALAA-01 and Adipotide in 2018 into very large potential markets, and assigns a 25% probability to CALAA-01 (some Phase I data is already available) and 15% to Adipotide (Phase I enrolment underway). Key rNPV assumptions are summarised in Exhibit 7. This model also assumes a discount rate of 12.5%, factors in a base running cost for the business and is adjusted for the 79% holding Arrowhead has in Calando (CALAA-01) and the 64%

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holding in Ablaris (Adipotide). Royalty assumptions assume a development/commercialisation partnership will be secured and are net of low single-digit payments to originators.

Exhibit 7: Arrowhead rNPV assumptions

Product(s) Status Probability of Estimated Estimated peak Current market Estimated Estimated success launch year market share value max. royalty peak sales CALAA-01 (oncology) Phase I 25% 2018 8% $5,000m 12% $623m Adipotide (obesity) Phase I 15% 2018 25% $7,500m 10% $2,921m

Total pipeline rNPV $60m Source: Edison Investment Research

The combined rNPV of these two compounds alone is $60m, well above the current EV of $33m based on end June net cash. If Arrowhead buys out the minorities in both Calando and Ablaris to gain 100% control of each, the valuation increases to $94m. We highlight that, as these programmes progress in the clinic, positive data will justify higher probabilities of success, increasing the valuation. Assessing potential for each clinical candidate depends on the size and competitive dynamics of the end market and the level of risk associated with the delivery platform, and will vary according to the level of clinical data available. As Exhibit 8 (overleaf) indicates, RNAi deal values have historically tended towards the high double-digit millions once effective gene knock down has been shown in Phase I. We highlight that for CALAA-01, first clinical data showing a dose dependent accumulation in melanoma cancer cells has been demonstrated, albeit in very small patient numbers.

We also highlight that the potential valuation uplift to our current rNPV does not include the earlier- stage pipeline or Arrowhead’s platform technologies as discussed above. Nevertheless, crystallisation of the value in the latter could drive a stock re-rating, as precedent deals in RNAi (Roche technologies; Exhibit 8) and drug conjugates (Alvos technologies: Exhibit 9) indicate. Latest company guidance for the execution of deals is for at least two PDC collaborations by Q113 and for at least one RNAi collaboration in the same timeframe.

Arrowhead Research Corporation | 15 August 2012

Exhibit 8: RNAi therapeutics deals since 2008

Company (provider/acquirer) Deal focus Financial terms / notes Silence/ AstraZeneca Delivery Undisclosed. 2008: focus on AtuPLEX platform. Alnylam/ Takeda RNAi triggers $100m upfront plus $50m for technology transfer and royalties. 2008: non-exclusive access to RNAi trigger technology. Alnylam/ Kyowa Hakko Product $15m plus R&D fees. 2008: rights to RSV drug. Mirus Bio/ Roche Delivery $125m. 2008: Roche buys delivery company. Alnylam/Cubist Product $20m upfront, $82.5m in development milestones. 2009: ALN-PSV01 (Phase II). mdRNA/ Roche RNAi triggers $5m upfront, limited royalties. 2009: non-exclusive license to RNAi trigger tech. Silence Therapeutics/ Delivery and $2m upfront plus milestones. 2009: use of Silence’s delivery technology. Dainippon Sumitomo RNAi triggers Dicerna/ Kyowa Hakko Delivery and $4m for first target, $120m in development funding. 2010: delivery collaboration for RNAi triggers cancer and endocrinology. Tekmira/ BMS Delivery $3m for an agreed number of SNALP batches. 2010: BMS gains SNALP formulations for target validation. Tekmira/ US Dept of Defense Product $34m funding over three years, up to $140m in licensing payments. 2010: sponsorship of EBOLA preclinical programme. Novosom/ Marina Biotech Delivery $3.8m in Marina stock. 2010: exclusive license to Novosom’s SMARTICLES. Quark Pharma/ Novartis Product $10m for option, potential for up to $500m in milestones. 2011: option to license Phase I/II kidney disease candidate. Samyang/ Takeda Delivery Undisclosed. 2011: co-development of delivery technology. Silence/ InteRNA Delivery Undisclosed. 2011: early collaborations using lipid-based delivery technology. Exhibit 9: Selected players and recent drug conjugate deals in oncology

Company Technology Partners Seattle Antibody targeted • Millennium/Takeda: collaboration for global development and commercialisation of Adcetris Genetics cytotoxic drug (brentuxumab vedotin). Millennium paid $60m upfront, with milestones totalling $230m and tiered conjugates (ADC): double-digit royalties. proprietary technology • Pfizer (2011): $8m upfront to access ADC technology for one target (5HT4 antigen), with potential employing synthetic, milestone payments of up to $200m. highly potent cell-killing • Abbott (2011): $8m upfront to access ADC technology for one target, with potential milestone agents called payments of up to $200m and single-digit sales royalties. auristatins and stable • Genentech: multiple ongoing collaborations and ADC licensing deals. 2010 deal with $12m to linker systems that access ADC technology targeted against select antigens; potential for up to $900m in milestones. attach the auristatin to • Agensys (Astellas): $12m to expand existing development and commercialization deal with $250m the antibody (linkage is in milestone payments and $100m in sales milestones. stable in serum, but • GSK: $12m upfront, up to $390m in milestone payments, and single digit sales royalties for releases its cytotoxin access to ADC technology for use in multiple antigen targets selected by GSK. payload once • Genmab: Use of ADC technology with Genmab’s HuMax-TF and HuMax-CD74 antibodies; internalized by Seattle Genetics has a post-Phase I co-development option. On-opt in, an undisclosed payment targeted cells). is due and all costs and profits shared 50:50; otherwise Genmab pays fees, undisclosed milestones, and mid-single digit sales royalties. • Other partners: Bayer, Progenics, Daiichi-Sankyo. Immunogen Targeted antibody • Eli Lilly (2011): $20m upfront for use of maytansinoid cytotoxin+linker technology with several Lilly payload (TAP) Mabs to develop novel cancer targeting ADCs. Each ADC candidate represents a separate technology: used to exclusive license associated with milestones up to $200m. combine this cytotoxin • Novartis (2010): $45m upfront for exclusive rights to TAP technology with antibodies to a specified and linker technologies number of antigen targets. Milestone payments up to $200.5m plus royalties could be could due with partners’ on each target which results in a cancer therapy. monoclonal antibodies • Bayer (2008): $4m upfront to use TAP technology for a single undisclosed target, potential (Mabs) to co-develop milestones up to $170.5m and royalties on sales. Bayer bears development costs. targeted ADC • Other partners: Biotest, Sanofi, Amgen and Roche/Genentech (including underpinning its Phase III therapies. HER2+ metastatic breast cancer programme, trastuzumab emtansine). Endocyte Vintafolide: conjugate Merck paid $120m upfront and milestones totalling up to $880m for global commercialisation rights of a folate targeting in up to six cancer indications. Endocyte is entitled to 50:50 profit share in the US and double digit ligand linked to the royalties in the rest of the world. Currently in a Phase III trial in platinum resistant ovarian cancer, vinca alkaloid and a Phase II study in non-small cell lung cancer. Both studies use Endocyte’s companion chemotherapy agent diagnostic, eterfolatide (EC20). desacetylvinblastine monohydrazine. Source: Edison Investment Research, Arrowhead

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Financials

Arrowhead changed structurally and financially at the end of 2011 after the acquisition of Roche’s RNAi therapeutics business, now Arrowhead Madison. Further structural changes are possible in the future if Arrowhead’s management decides to buy out the minority holdings in two of its subsidiary companies: Calando Pharmaceuticals, which controls the RONDEL delivery platform (currently 79% owned) and Ablaris, which owns Adipotide (64% held). Arrowhead provides financial, administrative, corporate and strategic resources to these subsidiaries, and also to the two early-stage nanomedicine companies in which it has minority investments: Nanotope (23%) and Leonardo Biosystems (5%).

Arrowhead’s most recent financial report was for the quarter ending June 2012. Operating costs for the quarter were $6.9m compared to $4-5m in prior quarters following the Roche acquisition. The recent quarter included a $2m non-cash charge to record a reserve against a receivable from Nanotope. Cash burn is approximately $1.5m per month after the acquisition of the Madison research facility. As the company’s near-term ambitions include the conclusion of the CALAA-01 Phase Ib trial, and bringing two internal RNAi candidates into the clinic (HBV and Hif 2alpha), there will continue to be upward pressure on the monthly cash burn.

As of 30 June 2012, Arrowhead had cash resources of $3.3m, with $2.3m in cash and equivalents plus $1m due in subscriptions from previous financings. A further $6.2m gross was raised from a share offering concluded in August 2012. This involved the placement of 2.3m additional shares plus warrants to purchase 1.7m shares over four years with an exercise price of $3.25. Other financing in 2012 included establishing of an equity credit line with Lincoln Park Capital for up to $15m over three years. $14m of this facility remains available. This credit line can be drawn on at any time at Arrowhead’s discretion, based on a formula related to prior trading.

In our forecasts we assume nominal revenue of $140k for FY12 and $100k for FY13; $105k has been booked to date in the first nine months of the FY12 financial year. However, Arrowhead intends to generate income from licensing deals in the near term, which the Alvos deal should help accelerate. During 2012 Arrowhead has drawn down $1m from the equity credit line and issued new equity to meet its financing requirements. For 2013 we have a forecast financing requirement of $20m. We acknowledge that Arrowhead has a number of available options to address this, including equity credit line drawdown, issuance of new equity, or revenues from potential licensing partners. For simplicity, we reflect this requirement in long-term debt in our financial model (Exhibit 10).

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Exhibit 10: Arrowhead Research Corporation financial summary 2009 2010 2011 2012e 2013e Year ending 30 Sept PROFIT & LOSS ($'000) Revenue 3,758 0 296 140 100 EBITDA (16,497) (1,522) (8,212) (19,360) (16,900) Operating profit (before GW and except) (16,884) (1,763) (8,454) (19,760) (17,300) Intangible amortisation 0 0 0 0 0 Exceptionals/special Items 0 (2,645) 5,293 0 0 Share-based payment (2,676) (1,424) (1,377) (1,000) (1,000) Operating profit (19,560) (5,833) (4,538) (20,760) (18,300) Net interest 416 1,521 1,045 0 0 Profit before tax (norm) (16,632) (243) (7,408) (19,760) (17,300) Tax 0 0 0 0 0 Profit after tax (norm.) (16,632) (243) (7,408) (19,760) (17,300) Average number of shares outstanding (m) 4.5 6.4 7.2 11.9 13.5 EPS - normalised (c) (369.6) (44.9) (29.4) (165.7) (128.1) Dividend per share (c) 0.0 0.0 0.0 0.0 0.0 EBITDA margin (%) N/A N/A N/A N/A N/A Operating margin (before GW and except) (%) N/A N/A N/A N/A N/A BALANCE SHEET Fixed assets 5,219 4,223 6,027 13,500 13,890 Intangible assets 2,362 2,047 1,731 4,750 4,750 Tangible assets 527 141 25 7,000 7,390 Investment in associates/other non core assets 2,329 2,035 4,271 1,750 1,750 Trade investment & others 0 0 0 0 0 Associated with assets held for sale 0 0 0 0 0 Current assets 2,484 8,132 9,861 3,257 4,347 Stocks 0 0 0 0 0 Debtors 144 872 1,608 2,000 2,000 Cash 2,020 6,847 7,507 1,257 2,347 Other 319 413 745 0 0 Current liabilities (2,344) (4,276) (2,582) (4,195) (4,195) Creditors (1,433) (1,176) (1,441) (2,500) (2,500) Other creditors (161) (191) (196) (750) (750) Short-term borrowings 0 0 0 0 0 Provisions and other current liabilities (750) (2,909) (945) (945) (945) Associated with assets held for sale 0 0 0 0 0 Long-term liabilities (500) 0 (742) (4,254) (22,254) Long-term borrowings 0 0 0 (2,000) (20,000) Deferred taxation 0 0 0 0 0 Other long-term liabilities (500) 0 (742) (2,254) (2,254) Net assets 4,858 8,078 12,564 8,308 (8,212) CASH FLOW Operating cash flow (15,114) (5,053) (7,656) (18,693) (16,900) Net interest 0 0 0 0 0 Tax 0 0 0 0 0 Capex (40) 0 (10) (10) (10) Purchase of intangibles 0 0 0 0 0 Acquisitions/disposals 2,779 0 1,553 (2,048) 0 Financing 5,275 12,165 4,507 12,500 0 Dividends 0 0 0 0 0 Other (974) (2,285) 2,265 0 0 Net cash flow (8,073) 4,827 660 (8,250) (16,910) Opening net debt/(cash) (10,094) (2,020) (6,847) (7,507) 743 HP finance leases initiated 0 0 0 0 0 Other 0 0 0 0 0 Closing net debt/(cash) (2,020) (6,847) (7,507) 743 17,653 Source: Company documents, Edison Investment Research. Notes: FY10 figures are restated to reflect the Unidym disposal and 1:10 reverse stock split. As per Edison policy, the financial forecasts for FY12 and FY13 do not include any assumption related to deal revenue. The financing requirement in FY12 and FY13 is shown as long-term borrowings for simplicity, although we acknowledge that this could be met through draw down on the Lincoln Park Capital credit line, equity issuance, or revenues from business development activities.

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Contact details Revenue by geography

225 South Lake Avenue N/A Suite 1050 Pasadena CA91101 USA + 1 626 3043400 www.arrowres.com

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation

EPS 2009-13e N/A ROCE 12e N/A Gearing 12e N/A Litigation/regulatory  EPS 2011-13e N/A Avg ROCE 2009-13e N/A Interest cover 12e N/A Pensions  EBITDA 2009-13e N/A ROE 12e N/A CA/CL 12e N/A Currency  EBITDA 2011-13e N/A Gross margin 12e N/A Stock turn 12e N/A Stock overhang  Sales 2009-13e N/A Operating margin 12e N/A Debtor days 12e N/A Interest rates  Sales 2011-13e N/A Gr mgn / Op mgn 12e N/A Creditor days 12e N/A Oil/commodity prices 

Management team

CEO: Chris Anzalone, PhD COO: Bruce Given, MD CEO since 2008. Previously founded private equity firm The Benet COO since 2011. CEO of Leonardo Biosystems since Feb 2010 and Group (investing in nanotechnology firms, including Nanotope and director of Calando since October 2009. Board member of ICON Leonardo BioSystems) and a partner at Galway Partners. Founding since 2004 (chairman since 2010). Previously CEO at Encysive CEO of NanoInk. Pharmaceuticals (acquired by Pfizer). Held senior operational roles at Janssen (J&J), and executive roles at Sandoz and Schering- Plough.

CFO: Ken Myszkowski, MBA, CPA Previously corporate controller at energy companies (Broadwind Energy and Epcor USA), and controller at two tech start-ups (NanoInk and Delphion). Prior corporate roles at FMC Corporation and Premark International, after beginning his career in audit at Arthur Andersen.

Principal shareholders (%)

Mainly retail held 91 Roche 7-9

Companies named in this report

Alnylam, Endocyte, Merck & Co, Quark Pharmaceuticals, Seattle Genetics, Silence Therapeutics, Tekmira

EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. It has won industry recognition, with awards both in Europe and internationally. The team of 90 includes over 55 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 350 companies across every sector and works directly with corporates, fund managers, investment banks, brokers and other advisers. Edison’s research is read by institutional investors, alternative funds and wealth managers in more than 100 countries. Edison, founded in 2003, has offices in London, New York and Sydney and is authorised and regulated by the Financial Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584).

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