UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒
x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31,~~ ~~2021~~

June 30, 2022

☐
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 001-38042

ARROWHEAD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

~~Delaware~~	~~46-0408024~~
Delaware		46-0408024
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

177 E. Colorado Blvd, Suite 700

Pasadena, California 91105

(626) 304-3400

(Address and telephone number of principal executive offices)

Former name, former address, and former fiscal year, if changed since last report: N/A

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ARWR

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒x No ☐o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒x

The number of shares of the registrant’s common stock outstanding as of ~~January 31,~~July 28, 2022 was ~~105,459,716.~~

105,848,963.

	~~Page(s)~~


			Page(s)
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS			1

Consolidated Balance Sheets (Unaudited)			1

Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)			2

Consolidated Statements of Stockholders’ Equity and Noncontrolling Interest			3

Consolidated Statements of Cash Flows			4

Notes to Consolidated Financial Statements			5

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17 19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			26 30

ITEM 4. CONTROLS AND PROCEDURES			26 30

PART II — OTHER INFORMATION			27 32

ITEM 1. LEGAL PROCEEDINGS			27 32

ITEM 1A. RISK FACTORS			27 32

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			27 32

ITEM 3. DEFAULTS UPON SENIOR SECURITIES			27 32

ITEM 4. MINE SAFETY DISCLOSURES			27 32

ITEM 5. OTHER INFORMATION			27 32

ITEM 6. EXHIBITS			28 33

SIGNATURE			29 34

PART I. FINANCIAL INFORMATION

~~ITEM 1.~~

ITEM 1. FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)


	(unaudited) December 31, 2021			September 30, 2021				(unaudited) June 30, 2022		September 30, 2021
ASSETS							ASSETS
CURRENT ASSETS							CURRENT ASSETS
Cash and cash equivalents	$	91,587		$	184,434		Cash and cash equivalents	$	139,439	$	184,434
Accounts receivable		150			10,255		Accounts receivable	239		10,255
Prepaid expenses		5,199			4,362		Prepaid expenses	6,761		4,362
Other current assets		2,795			2,191		Other current assets	8,892		2,191
Marketable securities		126,010			126,728		Marketable securities	—		126,728
Short term investments		112,537			56,627		Short term investments	277,057		56,627
TOTAL CURRENT ASSETS		338,278			384,597		TOTAL CURRENT ASSETS	432,388		384,597
Property and equipment, net		52,303			48,675		Property and equipment, net	71,904		48,675
Intangible assets, net		13,238			13,663		Intangible assets, net	12,387		13,663
Long term investments		217,572			245,595		Long term investments	165,920		245,595
Right-of-use assets		16,875			17,346		Right-of-use assets	68,908		17,346
Other assets		273			272		Other assets	275		272
TOTAL ASSETS	$	638,539		$	710,148		TOTAL ASSETS	$	751,782	$	710,148
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY							LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES							CURRENT LIABILITIES
Accounts payable	$	4,068		$	9,457		Accounts payable	$	5,894	$	9,457
Accrued expenses		18,518			14,001		Accrued expenses	32,499		14,001
Accrued payroll and benefits		2,968			9,773		Accrued payroll and benefits	2,648		9,773
Lease liabilities		2,826			2,250		Lease liabilities	2,883		2,250
Deferred revenue		108,652			111,055		Deferred revenue	84,288		111,055
TOTAL CURRENT LIABILITIES		137,032			146,536		TOTAL CURRENT LIABILITIES	128,212		146,536
LONG-TERM LIABILITIES							LONG-TERM LIABILITIES
Lease liabilities, net of current portion		22,489			23,295		Lease liabilities, net of current portion	78,231		23,295
Deferred revenue, net of current portion		106,458			131,495		Deferred revenue, net of current portion	71,162		131,495
TOTAL LONG-TERM LIABILITIES		128,947			154,790		TOTAL LONG-TERM LIABILITIES	149,393		154,790
Commitments and contingencies (Note 7)							Commitments and contingencies (Note 7)	0		0
STOCKHOLDERS’ EQUITY							STOCKHOLDERS’ EQUITY
Arrowhead Pharmaceuticals, Inc. stockholders’ equity:							Arrowhead Pharmaceuticals, Inc. stockholders’ equity:
Common stock, $0.001 par value; 145,000 shares authorized; 104,798 and 104,327 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively		197			197
Common stock, $0.001 par value; 145,000 shares authorized; 105,795 and 104,327 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively							Common stock, $0.001 par value; 145,000 shares authorized; 105,795 and 104,327 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	198		197
Additional paid-in capital		1,080,035			1,053,386		Additional paid-in capital	1,189,113		1,053,386
Accumulated other comprehensive income		(108	)		(69	)
Accumulated other comprehensive loss							Accumulated other comprehensive loss	(140)		(69)
Accumulated deficit		(707,564	)		(644,692	)	Accumulated deficit	(735,244)		(644,692)
TOTAL ARROWHEAD PHARMACEUTICALS INC. STOCKHOLDERS' EQUITY							TOTAL ARROWHEAD PHARMACEUTICALS INC. STOCKHOLDERS' EQUITY	453,927		408,822
Noncontrolling Interest							Noncontrolling Interest	20,250		—
TOTAL STOCKHOLDERS’ EQUITY		372,560			408,822		TOTAL STOCKHOLDERS’ EQUITY	474,177		408,822
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	638,539		$	710,148
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY							TOTAL LIABILITIES, NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY	$	751,782	$	710,148

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

(In thousands, except per share amounts)


	Three Months Ended December 31,							Three Months Ended June 30,				Nine Months Ended June 30,
	2021			2020				2022		2021		2022		2021
REVENUE	$	27,439		$	21,303		REVENUE	$	32,412	$	45,891	$	211,656	$	100,004
OPERATING EXPENSES							OPERATING EXPENSES
Research and development		65,765			36,555		Research and development	72,180		59,325		213,930		140,576
General and administrative expenses		24,995			8,802		General and administrative expenses	33,141		18,434		92,403		43,581
TOTAL OPERATING EXPENSES		90,760			45,357		TOTAL OPERATING EXPENSES	105,321		77,759		306,333		184,157
OPERATING INCOME (LOSS)		(63,321	)		(24,054	)	OPERATING INCOME (LOSS)	(72,909)		(31,868)		(94,677)		(84,153)
OTHER INCOME (EXPENSE)
OTHER INCOME							OTHER INCOME
Interest income, net		1,156			2,169		Interest income, net	1,240		1,280		3,450		4,972
Other income (expense)		(707	)		1,153		Other income (expense)	(377)		664		675		1,707
TOTAL OTHER INCOME (EXPENSE)		449			3,322
TOTAL OTHER INCOME							TOTAL OTHER INCOME	863		1,944		4,125		6,679
INCOME (LOSS) BEFORE INCOME TAXES		(62,872	)		(20,732	)	INCOME (LOSS) BEFORE INCOME TAXES	(72,046)		(29,924)		(90,552)		(77,474)
Provision for income taxes		-			-		Provision for income taxes	—		—		—		—
NET INCOME (LOSS)		(62,872	)		(20,732	)	NET INCOME (LOSS)	(72,046)		(29,924)		(90,552)		(77,474)
NET INCOME (LOSS) PER SHARE - BASIC	$	(0.60	)	$	(0.20	)	NET INCOME (LOSS) PER SHARE - BASIC	$	(0.68)	$	(0.29)	$	(0.86)	$	(0.75)
NET INCOME (LOSS) PER SHARE - DILUTED	$	(0.60	)	$	(0.20	)	NET INCOME (LOSS) PER SHARE - DILUTED	$	(0.68)	$	(0.29)	$	(0.86)	$	(0.75)
Weighted average shares outstanding - basic		104,534			102,757		Weighted average shares outstanding - basic	105,753		104,099		105,273		103,569
Weighted average shares outstanding - diluted		104,534			102,757		Weighted average shares outstanding - diluted	105,753		104,099		105,273		103,569
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:							OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments		(39	)		180		Foreign currency translation adjustments	(33)		(40)		(71)		44
COMPREHENSIVE INCOME (LOSS)	$	(62,911	)	$	(20,552	)	COMPREHENSIVE INCOME (LOSS)	$	(72,079)	$	(29,964)	$	(90,623)	$	(77,430)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Equity

and Noncontrolling Interest

(unaudited)

(In thousands, except per share amounts)

	Common Stock		Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Totals
Balance at September 30, 2020		102,376	$	195	$	965,410	$	18		$	(503,844	)	$	461,779
																	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at March 31, 2021																Balance at March 31, 2021	104,020	$	196	$	996,645	$	102	$	(551,394)	$	—	$	445,549
Stock-based compensation		-		-		8,144		-			-			8,144		Stock-based compensation	—	—		18,549		—		—		—		18,549
Exercise of stock options		538		-		5,101		-			-			5,101		Exercise of stock options	161	1		2,755		—		—		—		2,756
Common stock - restricted stock units vesting		280		-		-		-			-			-		Common stock - restricted stock units vesting	28	—		—		—		—		—		—
Foreign currency translation adjustments		-		-		-		180			-			180		Foreign currency translation adjustments	—	—		—		(40)		—		—		(40)
Net income (loss) for the three months ended December 31, 2020		-		-		-		-			(20,732	)		(20,732	)
Balance at December 31, 2020		103,194	$	195	$	978,655	$	198		$	(524,576	)	$	454,472

	Common Stock		Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Totals
Balance at September 30, 2021		104,327	$	197	$	1,053,386	$	(69	)	$	(644,692	)	$	408,822
Stock-based compensation		-		-		24,504		-			-			24,504
Exercise of stock options		208				2,145		-			-			2,145
Common stock - restricted stock units vesting		263		-		-		-			-			-
Foreign currency translation adjustments		-		-		-		(39	)		-			(39	)
Net income (loss) for the three months ended December 31, 2021		-		-		-		-			(62,872	)		(62,872	)
Balance at December 31, 2021		104,798	$	197	$	1,080,035	$	(108	)	$	(707,564	)	$	372,560
Net income (loss) for the three months ended June 30, 2021																Net income (loss) for the three months ended June 30, 2021	—	—		—		—		(29,924)		—		(29,924)
Balance at June 30, 2021																Balance at June 30, 2021	104,209	$	197	$	1,017,949	$	62	$	(581,318)	$	—	$	436,890


	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at March 31, 2022	105,702	$	198	$	1,115,373	$	(107)	$	(663,198)	$	—	$	452,266
Stock-based compensation	—	—		33,391		—		—		—		33,391
Exercise of stock options	53	—		599		—		—		—		599
Common stock - restricted stock units vesting	40	—		—		—		—		—		—
Foreign currency translation adjustments	—	—		—		(33)		—		—		(33)
Interest in joint venture	—	—		39,750		—		—		20,250		60,000
Net income (loss) for the three months ended June 30, 2022	—	—		—		—		(72,046)		—		(72,046)
Balance at June 30, 2022	105,795	$	198	$	1,189,113	$	(140)	$	(735,244)	$	20,250	$	474,177


	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at September 30, 2020	102,376	$	195	$	965,410	$	18	$	(503,844)	$	—	$	461,779
Stock-based compensation	—	—		42,051		—		—		—		42,051
Exercise of stock options	981	1		10,489		—		—		—		10,490
Common stock - restricted stock units vesting	852	1		(1)		—		—		—		—
Foreign currency translation adjustments	—	—		—		44		—		—		44
Net income (loss) for the nine months ended June 30, 2021	—	—		—		—		(77,474)		—		(77,474)
Balance at June 30, 2021	104,209	$	197	$	1,017,949	$	62	$	(581,318)	$	—	$	436,890


	Common Stock	Amount ($)		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Noncontrollling Interest		Totals
Balance at September 30, 2021	104,327	$	197	$	1,053,386	$	(69)	$	(644,692)	$	—	$	408,822
Stock-based compensation	—	—		91,697		—		—		—		91,697
Exercise of stock options	497	—		4,281		—		—		—		4,281
Common stock - restricted stock units vesting	971	1		(1)		—		—		—		—
Foreign currency translation adjustments	—	—		—		(71)		—		—		(71)
Interest in joint venture	—	—		39,750		—		—		20,250		60,000
Net income (loss) for the nine months ended June 30, 2022	—	—		—		—		(90,552)		—		(90,552)
Balance at June 30, 2022	105,795	$	198	$	1,189,113	$	(140)	$	(735,244)	$	20,250	$	474,177

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands, except per share amounts)


	Three Months Ended December 31,							Nine Months Ended June 30,
	2021			2020				2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:							CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(62,872	)	$	(20,732	)	Net income (loss)	$	(90,552)	$	(77,474)
Stock-based compensation		24,504			8,144		Stock-based compensation	91,697		42,051
Depreciation and amortization		2,573			1,848		Depreciation and amortization	7,761		5,763
Unrealized (gains) losses on marketable securities							Unrealized (gains) losses on marketable securities	5,755		(1,387)
Amortization/(accretion) of note premiums/discounts		(280	)		(302	)	Amortization/(accretion) of note premiums/discounts	2,013		142
Changes in operating assets and liabilities:							Changes in operating assets and liabilities:
Accounts receivable		10,105			(8,157	)	Accounts receivable	10,016		174
Prepaid expenses and other current assets		(1,181	)		(3,193	)	Prepaid expenses and other current assets	(8,876)		(2,895)
Deferred revenue		(27,439	)		(12,547	)	Deferred revenue	(87,100)		211,392
Accounts payable		(5,389	)		(2,002	)	Accounts payable	(3,563)		3,208
Accrued expenses		(2,290	)		(1,126	)	Accrued expenses	1,713		13,682
Other		922			(855	)	Other	3,672		685
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(61,347	)		(38,922	)	NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(67,464)		195,341
CASH FLOWS FROM INVESTING ACTIVITIES:							CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(5,778	)		(4,271	)	Purchases of property and equipment	(20,066)		(15,368)
Purchases of investments		(65,875	)		-		Purchases of investments	(223,391)		(95,195)
Proceeds from sale of investments		38,268			34,429		Proceeds from sale of investments	201,595		87,130
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(33,385	)		30,158		NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(41,862)		(23,433)
CASH FLOWS FROM FINANCING ACTIVITIES:							CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercises of stock options		1,885			5,102		Proceeds from the exercises of stock options	4,331		10,490
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		1,885			5,102
Proceeds from investment in joint venture							Proceeds from investment in joint venture	60,000		—
NET CASH PROVIDED BY FINANCING ACTIVITIES							NET CASH PROVIDED BY FINANCING ACTIVITIES	64,331		10,490
NET INCREASE (DECREASE) IN CASH		(92,847	)		(3,662	)	NET INCREASE (DECREASE) IN CASH	(44,995)		182,398
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		184,434			143,583		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	184,434		143,583
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	91,587		$	139,921		CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	139,439	$	325,981

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Arrowhead Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Pharmaceuticals, Inc., a Delaware corporation and its Subsidiaries, (2) the terms “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers to Arrowhead Madison Inc. (“Arrowhead Madison”), Visirna Therapeutics Inc. ("Visirna"), and Arrowhead Australia Pty Ltd (“Arrowhead Australia”), (4) the term “Common Stock” refers to Arrowhead’s Common Stock, par value $0.001 per share, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock, par value $0.001 per share, and (6) the term “Stockholder(s)” refers to the holders of Arrowhead’s Common Stock.

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business and Recent Developments

Arrowhead Pharmaceuticals, Inc. develops medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company’s pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ~~ARO-ENaC~~ARO-ENaC2 for cystic fibrosis, ~~ARO-HIF2 for renal cell carcinoma,~~ ARO-DUX4 for facioscapulohumeral muscular dystrophy, ~~ARO-LUNG2 for chronic obstructive pulmonary disorder,~~ ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens, ARO-C3 for complement mediated diseases, ~~and~~ ARO-RAGE and ARO-MUC5AC for various muco-obstructive or inflammatory pulmonary ~~conditions.~~conditions and ARO-MMP7 for idiopathic pulmonary fibrosis. ARO-HSD for liver disease was out-licensed to Glaxosmithkline Intellectual Property (No. 3) Limited (“GSK”) in November 2021. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ~~ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).~~ JNJ-75220795 (ARO-JNJ1) is being developed by Janssen as a potential treatment for patients with non-alcoholic steatohepatitis (NASH). ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc. (“Takeda”) in October 2020. JNJ-3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 2018. Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016. While the Company believes that initial ARO-HIF2 Phase 1 clinical data provides proof of concept for the ability to deliver siRNA to RCC tumors, the Company has decided not to pursue further clinical development of ARO-HIF2 based on a number of factors including the evolving competitive landscape for HIF2 inhibitors.

Arrowhead operates lab facilities in Madison, Wisconsin and San Diego, California, where the Company’s research and development activities, including the development of RNAi therapeutics, take place. The Company’s principal executive offices are located in Pasadena, ~~California~~.

California.

During the first ~~quarter~~three quarters of fiscal 2022, the Company continued to develop and advance its pipeline and partnered candidates and expanded its facilities to support the Company’s growing pipeline. Several key recent developments include:

~~dosed the first patients in its PALISADE study, a phase 3 clinical study to evaluate the safety and efficacy of ARO-APOC3 in adults with familial chylomicronemia syndrome (FCS);~~

~~ii)~~i)dosed the first patients in its PALISADE study, a phase 3 clinical study to evaluate the safety and efficacy of ARO-APOC3 in adults with familial chylomicronemia syndrome (FCS);

~~entered into an exclusive license agreement with GSK for ARO-HSD;~~

~~iii)~~ii)entered into an exclusive license agreement with GSK for ARO-HSD;

Janssen presented clinical data from REEF-1, a Phase 2b study of different combination regimens, including JNJ-73763989 (JNJ-3989), formerly called ARO-HBV, and/or JNJ-56136379 (JNJ-6379), and a nucleos(t)ide analog (NA) for the treatment of chronic hepatitis B virus infection (CHB);

~~iv)~~iii)Janssen presented clinical data from REEF-1, a Phase 2b study of different combination regimens, including JNJ-73763989 (JNJ-3989), formerly called ARO-HBV, and/or JNJ-56136379 (JNJ-6379), and a nucleos(t)ide analog (NA) for the treatment of chronic hepatitis B virus infection (CHB);

~~filed for regulatory clearance to begin a Phase 1/2a study of ARO-C3;~~

v)iv)filed for regulatory clearance to begin a Phase 1/2a study of ARO-C3 and subsequently dosed the first subjects in AROC3-1001, a Phase 1/2 clinical study of ARO-C3, the Company’s investigational RNA interference (RNAi) therapeutic designed to reduce production of complement component 3 (C3) as a potential therapy for various complement mediated diseases;

~~presented additional interim clinical data from AROHSD1001, AROAAT2002, and AROAPOC31001; and~~

~~vi)~~v)presented additional interim clinical data from AROHSD1001, AROAAT2002, and AROAPOC31001;

completed the purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is planned to be the site of an approximately 140,000 square foot laboratory and office facility and entered into a lease agreement for a new 144,000 square foot laboratory and office facility in San Diego, California. Both facilities will provide additional space to support the Company’s continued growth.

vi)completed the purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin and held a groundbreaking ceremony on the site. The site is being developed into an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility which will support the Company's process development and analytical activities. The Company also announced that it received awards for up to $16 million in tax increment financing from the city of Verona, and up to $2.5 million in refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives to invest in the local community and create new jobs. Additionally, The Company entered into a lease agreement for a new 144,000 square foot laboratory and office facility in San Diego, California to support discovery activities;

vii)completed enrollment in Phase 2b ARCHES-2 study of investigational ARO-ANG3 for patients with mixed dyslipidemia;

viii)filed for regulatory clearance to initiate Phase 1/2a study of ARO-RAGE for treatment of Asthma;

ix)filed for regulatory clearance to initiate Phase 1/2a study of ARO-MUC5AC for treatment of muco-obstructive lung disease;

x)initiated and dosed the first patients in the Phase 2 GATEWAY clinical study of investigational ARO-ANG3 for the treatment of patients with homozygous familial hypercholersterolemia;

xi)entered into definitive agreements to form a joint venture, Visirna Therapeutics, Inc. (“Visirna”) with Vivo Capital (“Vivo”) through which the Company and Vivo intend to expand the reach of innovative medicines in Greater China;

xii)hosted a pulmonary research & development (R&D) Day to discuss the Company’s emerging pipeline of pulmonary targeted RNA interference (RNAi) therapeutic candidates that leverage its proprietary Targeted RNAi Molecule (TRIMTM) platform, including an announcement of its previously undisclosed candidate designed to reduce expression of matrix metalloproteinase 7 (MMP7) as a potential treatment for idiopathic pulmonary fibrosis (IPF); and

xiii)in conjunction with Takeda, announced results from a Phase 2 clinical study (AROAAT-2002) of investigational fazirsiran (TAK-999/ARO-AAT) for the treatment of liver disease associated with alpha-1 antitrypsin deficiency (AATD), and was recently published in the New England Journal of Medicine (NEJM) and presented in an oral presentation at The International Liver Congress™ 2022 - The Annual Meeting of the European Association for the Study of the Liver (EASL).

The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and nine months ended ~~December 31, 2021~~June 30, 2022 were not significantly impacted by COVID-19. Operationally, the Company has experienced delays in its earlier stage programs due to a shortage in non-human primates, which are critical to the Company’s preclinical programs. Additionally, the Company has experienced delays in enrollment in its clinical trials. The Company’s operations at its research and development facilities in Madison, Wisconsin and San Diego, California, and its corporate headquarters in Pasadena, California have continued with limited impact, other than for enhanced safety measures ~~including work from home policies~~ and intermittent lab supply shortages. However, the Company cannot predict the impact the progression of COVID-19 will have on future financial and operational results due to a variety of factors, including the ability of the Company’s clinical sites to continue to enroll subjects, the ability of the Company’s suppliers to continue to operate, the continued good health and safety of the Company’s employees and the length and severity of the COVID-19 pandemic.

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern. Historically, the Company’s primary sources of financing have been through the sale of its securities and revenue from its licensing and collaboration agreements. Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure in the future, particularly as the Company’s pipeline of drug candidates and its headcount have both expanded significantly. Additionally, significant capital investment will be required as the Company’s pipeline matures into later stage clinical trials, as well as with the Company’s plans to increase its internal manufacturing ~~capabilities.~~

capabilities, and expand its footprint in Verona, Wisconsin and San Diego, California.

At ~~December 31, 2021,~~June 30, 2022, the Company had ~~$91.6~~$139.4 million in cash and cash equivalents (including ~~$3.0~~$7.4 million in restricted cash), ~~$112.5~~$277.1 million in short-term investments, ~~$126.0 million~~$0 in marketable securities and ~~$217.6~~$165.9 million in long-term investments to fund operations. $60 million of our cash balance resulted from the formation of our joint venture, Viserna. During the ~~three~~nine months ended ~~December 31, 2021,~~June 30, 2022, the Company’s cash and investments balance decreased by ~~$65.7~~$31.0 million, which was primarily due to cash being used to fund the Company’s ~~operations.~~

operations, partially offset by the $120.0 million upfront payment received from GSK, and $60 million cash infusion to Viserna.

In total, the Company remains eligible for $~~6.2~~$4.9 billion in developmental, regulatory and sales milestones and various royalties on net sales from its licensing and collaboration agreements. The revenue recognition for these collaboration agreements is discussed further in Note 2 ~~below~~.

below.

Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements that have significantly impacted this Quarterly Report on Form 10-Q, beyond those disclosed in the Company’s most recent Annual Report on Form 10-K.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In our opinion, the unaudited consolidated financial statements have been prepared on the same basis as audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows. The interim results are not necessarily indicative of the results of operations to be expected for the year ending September 30, 2022 or any other period.

The accompanying unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries, as well as the accounts of Visirna, a variable interest entity for which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interest in our unaudited consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2021, filed with the SEC.

NOTE 2. COLLABORATION AND LICENSE AGREEMENTS

Amgen Inc.

On September 28, 2016, the Company entered into 2 collaboration and license agreements and a common stock purchase agreement with Amgen. Under the Second Collaboration and License Agreement (the “Olpasiran Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel RNAi Olpasiran (previously referred to as AMG 890 or ARO-LPA) program. These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Under the prior collaboration and license agreement (the “First Collaboration and License Agreement” or the “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license for ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target. Under both agreements, Amgen is wholly responsible for clinical development and commercialization. Under the terms of the agreements taken together, the Company has received $35.0 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and $30.0 million in milestone payments, and may receive up to an additional $400.0 million in remaining development, regulatory and sales milestone payments. The Company is further eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement. In July 2019, Amgen informed the Company that it would not be exercising its option for an exclusive license for ARO-AMG1, and as such, there will be no further milestone or royalty payments under

the ARO-AMG1 Agreement.

The Company has evaluated these agreements in accordance with FASB Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from Customers. The Company has substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 Agreement. Future milestones and royalties achieved will be recognized in their entirety when earned. In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $20.0 million milestone payment to the Company. During the three and nine months ended ~~December 31,~~June 30, 2022 and 2021, ~~and 2020,~~ the Company recognized $0 and $0 of revenue associated with its agreement with Amgen, respectively. As of ~~December 31, 2021,~~June 30, 2022, there were $0 in contract assets recorded as accounts receivable and $0 contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into a License Agreement (the “Janssen License Agreement”) and a Research Collaboration and Option Agreement (the “Janssen Collaboration Agreement”) with Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson. The Company also entered into a stock purchase agreement with JJDC (“JJDC Stock Purchase Agreement”). Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company was responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989. Under the Janssen Collaboration Agreement, Janssen ~~will be~~was able to select three new targets against which Arrowhead ~~will~~would develop clinical candidates. These candidates ~~are~~were subject to certain restrictions and do not include candidates that already were in the Company’s pipeline. The Company ~~will~~was obligated to perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, iswould have been sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen ~~will~~would have the option to take an exclusive license. If the option iswas exercised, Janssen ~~will be~~would have been wholly responsible for clinical development and commercialization of each optioned candidate. Under the terms of the agreements taken together, the Company has received $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling ~~$70.0~~$73.0 million, and the Company may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to ~~$1.9~~$0.6 billion in development and sales milestone payments for the ~~3 additional targets~~remaining target covered under the Janssen Collaboration Agreement. The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

During the three months ended June 30, 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement.

The Company has evaluated these agreements in accordance with FASB Topics 808 – Collaboration Arrangements and 606 - Revenue for Contracts from Customers. At the inception of these agreements, the Company identified 1 distinct performance obligation. Regarding the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibility to complete the Phase 1/2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the “Janssen R&D Services”). Due to the specialized and unique nature of these Janssen R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation. The Company also determined that Janssen’s option to require the Company to develop up to three new targets is not a material right and, thus, not a performance obligation at the onset of the agreement. The consideration for this option is accounted for separately.

The Company determined the transaction price totaled approximately $252.7 million, which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, two $25.0 million milestone payments related to JNJ-3989 (ARO-HBV), and estimated payments for reimbursable Janssen R&D Services to be performed. The Company has allocated the total $252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services. The Company has recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed. Future milestones and royalties achieved will be recognized in their entirety when earned. During the three months ended ~~December 31,~~June 30, 2022 and 2021, ~~and 2020,~~ the Company recognized approximately $0 and ~~$12.7~~$0 of revenue associated with this performance obligation, respectively. During the nine months ended June 30, 2022 and 2021, the Company recognized approximately $0 and $20.2 million of revenue associated with this performance obligation, respectively. As of ~~December 31, 2021,~~June 30, 2022, there were $0 in contract

assets recorded as accounts receivable, and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

The Company has ~~begun to conduct~~conducted its discovery, optimization and preclinical research and development of JNJ-75220795 (ARO-JNJ1), ARO-JNJ2, and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company ~~will be~~have been entirely funded by Janssen. During the three months ended ~~December 31~~,June 30, 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement as reported in the second quarter of 2022. During the three months ended June 30, 2022 and 2021, ~~and 2020,~~ the Company recognized $0$0.0 million and ~~$0.3~~$0.2 million of revenue associated with these efforts, respectively. During the nine months ended June 30, 2022 and 2021, the Company recognized $0.1 million and $0.5 million of revenue associated with these efforts, respectively. In May 2021, Janssen exercised its option right for ARO-JNJ1, which resulted in a $10.0 million milestone payment to the Company. This $10 million milestone payment was recognized entirely during the three months ended June 30, 2021. As of ~~December 31, 2021,~~June 30, 2022, there were $0 of ~~contract~~contract assets recorded as accounts receivable and $0 of contract liabilities recorded as ~~curren~~tcurrent deferred revenue on the Company’s Consolidated Balance Sheets. ~~Sheets.~~

Takeda Pharmaceuticals U.S.A., Inc.

On October 7, 2020, the Company entered into an Exclusive License and Co-funding agreement (the “Takeda License Agreement”) with Takeda. Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program, the Company’s second-generation subcutaneously administered RNAi therapeutic candidate being developed as a treatment for liver disease associated with alpha-1 antitrypsin deficiency. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize ARO-AAT, while the Company will be eligible to receive tiered royalties of 20% to 25% on net sales. In January 2021, the Company received $300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $740.0 million.

The Company has evaluated the Takeda License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers. At the inception of the Takeda License Agreement, the Company identified 1 distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of ARO-AAT drug product is completed and delivered to Takeda (the “Takeda R&D Services”). Due to the specialized and unique nature of these Takeda R&D Services and their direct relationship with the license, the Company determined that these deliverables represent 1 distinct bundle and, thus, one performance obligation. Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization outside the United States. Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States. The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate.

The Company determined the initial transaction price totaled $300.0 million, which includes the upfront payment. The Company has excluded any future milestones or royalties from this transaction price to date. The Company has allocated the total $300.0 million initial transaction price to its one distinct performance obligation for the ARO-AAT license and the associated Takeda R&D Services. Revenue will be recognized using a proportional performance method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). Revenue for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$20.8~~$25.5 million and ~~$8.2~~$35.7 million, respectively. Revenue for the nine months ended June 30, 2022 and 2021 was $67.1 million and $69.3 million, respectively. As of ~~December 31, 2021,~~June 30, 2022, there were $0 in contract assets recorded as accounts receivable, ~~$82.0~~$71.0 million in contract liabilities recorded as deferred revenue and ~~$106.5~~$71.2 million in contract liabilities recorded as deferred revenue, net of the current portion, and ~~$2.9~~$7.8 million in contract liabilities recorded as accrued expenses. The ~~$2.9~~$7.8 million in accrued expenses was primarily driven by co-development and co-commercialization activities.

Horizon Therapeutics Ireland DAC

On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon. Under the Horizon

License Agreement, Horizon received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones. The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.

The Company has evaluated the Horizon License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers. At the inception of the Horizon License Agreement, the Company identified one distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibilities to conduct all activities through the preclinical stages of development of ARO-XDH (the “Horizon R&D Services”). Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represented 1 distinct bundle and, thus, 1 performance obligation. Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon will be responsible for managing future clinical development and commercialization of ARO-XDH.

The Company determined the initial transaction price totaled $40.0 million, including the upfront payment. The Company has excluded any future estimated milestones or royalties, from this transaction price to date. The Company will allocate the total $40.0 million initial transaction price to its 1 distinct performance obligation for the ARO-XDH license and the associated Horizon R&D Services. Revenue will be recognized on a straight-line basis over the estimated timeframe for completing the Horizon R&D Services. The Company determined that the straight-line basis was appropriate as its efforts will be expended evenly over the course of completing its performance obligation. Revenue for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was $6.7 million and $0, respectively. Revenue for the nine months ended June 30, 2022 and 2021 was $20.0 million and $0, respectively. As of ~~December 31, 2021,~~June 30, 2022, there were ~~$0.1~~$0 million in contract assets recorded as accounts receivable, ~~$26.7~~$13.3 million in contract liabilities recorded as deferred revenue.

The Company has manufactured ARO-XDH material for Horizon in furtherance of the research plan entered into pursuant to the Horizon License Agreement, for which the Company has been reimbursed for its costs. During the nine months ended June 30, 2022 and 2021, the Company recognized $1.3 million and $0 with these efforts, respectively. As of June 30, 2022, there were $0.0 million of contract assets recorded as accounts receivable and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Glaxosmithkline Intellectual Property (No. 3) Limited

On November 22, 2021, the Company entered into an Exclusive License Agreement (the “GSK License Agreement”) with GSK. Under the GSK License Agreement, GSK has received an exclusive license for ARO-HSD, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH). The exclusive license is worldwide with the exception of greater China, for which the Company ~~will retain~~retained rights to develop and commercialize. Beyond the Company’s Phase 1/2 study of (ARO-HSD), which the Company is responsible for completing, GSK is wholly responsible for clinical development and commercialization of ARO-HSD in its territory. Under the terms of the agreement, the Company has received an upfront payment of $120 million and is eligible for additional payments of $30 million at the start of Phase 2 and $100 million upon achieving a successful Phase 2 trial readout and the first patient dosed in a Phase 3 trial. Furthermore, should the Phase 3 trial read out positively, and the potential new medicine receives regulatory approval in major markets, the deal provides for commercial milestone payments to the Company of up to $190 million at first commercial sale, and up to $590 million in sales-related milestone payments. The Company is further eligible to receive tiered royalties on net product sales in a range of mid-teens to twenty percent.

The Company has evaluated the GSK License Agreement in accordance with FASB Topics 808 – Collaborative Arrangements and 606 - Revenue for Contracts from Customers. At the inception of the GSK License Agreement, the Company identified 1 distinct performance obligation. The Company determined that the key deliverables included the license and certain R&D services, including the Company’s responsibility to complete the Phase 1/2 study, (the “GSK R&D Services”). Due to the specialized and unique nature of these GSK R&D Services and their direct relationship with the license, the Company determined that these deliverables represented 1 distinct bundle and, thus, one performance obligation. Beyond the GSK R&D Services, which are the responsibility of the Company, GSK will be responsible for managing future clinical development and commercialization in its territory.

The Company determined the initial transaction price totaled $120.0 million, including the upfront payment. The $120.0 million upfront payment was collected in January 2022. The Company has excluded any future estimated milestones or royalties from this transaction price to date. The Company has allocated the total $120.0 million initial transaction price to its one distinct performance obligation for the ARO-HSD license and the associated GSK R&D Services. ~~Revenue will be recognized using a proportional~~As the Company has completed its performance method. As of December 31, 2021, 0 revenue or contract assets or liabilities were recognized as the GSK License Agreement had not yet completed customary closing conditions, including clearance by the relevant competition authorities. This clearance was achieved in January 2022 andobligation related to this agreement, the upfront payment of $120.0 million will be fully recognized as of the three and nine months ended June 30, 2022. Revenue for the nine months ended June 30, 2022 and 2021 was ~~also received by~~$120.0 million and $0, respectively. As of June 30, 2022, there were $0 in contract assets recorded as accounts receivable, $0 in contract liabilities recorded as deferred revenue.

Joint Venture and License Agreement with Visirna Therapeutics, Inc.

Pursuant to a Share Purchase Agreement entered into simultaneously with the Visirna License Agreement (the “Visirna SPA”), the Company acquired a majority stake in Visirna (after accounting for shares reserved for Visirna’s employee stock ownership plan) as partial consideration for the Visirna License Agreement.Under the Visirna SPA, entities affiliated with Vivo Capital (“Vivo”) also acquired a minority stake in Visirna in exchange for $60 million in upfront capital to support the operations of Visirna.As further consideration under the Visirna License Agreement, the Company is also eligible to receive potential royalties on commercial sales.

The Company has determined that Visirna is a variable interest entity upon its formation and as of June 30, 2022, and it has been determined that Arrowhead is the primary beneficiary; accordingly, Arrowhead consolidates the financial statements of Visirna.

NOTE 3. PROPERTY AND EQUIPMENT

The following table summarizes the Company’s major classes of property and equipment:


	December 31, 2021			September 30, 2021				June 30, 2022		September 30, 2021
	(In thousands)							(In thousands)
Computers, software, office equipment and furniture	$	2,182		$	2,170		Computers, software, office equipment and furniture	$	2,210	$	2,170
Research equipment		28,010			27,500		Research equipment	31,678		27,500
Leasehold improvements		41,977			41,524		Leasehold improvements	42,017		41,524
Construction in Progress		2,152			345		Construction in Progress	22,338		345
Land		2,996			-		Land	2,996		—
Total gross fixed assets		77,317			71,539		Total gross fixed assets	101,239		71,539
Less: Accumulated depreciation and amortization		(25,014	)		(22,864	)	Less: Accumulated depreciation and amortization	(29,335)		(22,864)
Property and equipment, net	$	52,303		$	48,675		Property and equipment, net	$	71,904	$	48,675

Depreciation and amortization expense for property and equipment for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$2.1~~$2.2 million and ~~$1.4~~$1.6 million, respectively. Depreciation and amortization expense for property and equipment for the nine months ended June 30, 2022 and 2021 was $6.5 million and $4.5 million, respectively. Construction in Progress relates to the Company’s Verona and San Diego research facilities. Land ~~both relate~~relates to the Company’s Verona, Wisconsin research facility.

NOTE 4. INVESTMENTS

Investments at ~~December 31, 2021~~June 30, 2022 primarily consisted of commercial paper and corporate bonds that have maturities of less than 36 months and a certificate of ~~deposit~~deposit. Cash and ~~marketable equity securities.~~cash equivalents consist of cash on hand and commercial paper purchased with 90-days or less remaining to maturity. The Company’s corporate bonds consist of both short-term and long-term bonds and are classified as “held-to-maturity” on the Company’s Consolidated Balance Sheets. The Company’s certificate of deposit matures in less than 12 months and is classified as “held-to-maturity” on the Company’s Consolidated Balance ~~Sheet.~~Sheet,’. The Company’s marketable equity securities ~~consist~~consisted of mutual funds that primarily invest in U.S. government bonds, U.S. government agency bonds, corporate bonds and other asset-backed debt securities. Dividends from these funds ~~are~~were automatically re-invested. In April 2022, all marketable securities were sold for $122.3 million. The Company may also invest excess cash balances in money market accounts, ~~government-sponsored enterprise~~and these securities ~~and/or commercial paper.~~would be classified as cash and cash equivalents on the Company’s Consolidated Balance Sheet. The Company accounts for its ~~held to maturity~~“held-to-maturity” investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities and its marketable equity securities in accordance with ASC 321, Investments – Equity Securities.

We did not record any impairment charges related to our marketable debt securities during the three and nine months ended June 30, 2022.

The following tables summarize the Company’s short-term and long-term investments and marketable securities as of ~~December 31, 2021~~June 30, 2022 and September 30, 2021 by measurement category:

Held to Maturity	As of December 31, 2021
	(In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			As of June 30, 2022
											(In thousands)
											Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Classified as Cash Equivalents										Classified as Cash Equivalents
Commercial notes (due within ninety days)										Commercial notes (due within ninety days)	$	25,325	$	11	$	—	$	25,336
Classified as Held to Maturity										Classified as Held to Maturity
Commercial notes (due within one year)	$	62,537	$	687	$	-		$	63,224	Commercial notes (due within one year)	$	227,057	$	21	$	(1,588)	$	225,490
Commercial notes (due within one through three years)	$	217,572	$	381	$	(1,374	)	$	216,579	Commercial notes (due within one through three years)	$	165,920	$	—	$	(6,380)	$	159,540
Certificate of deposit (due within one year)	$	50,000	$	-	$	-		$	50,000	Certificate of deposit (due within one year)	$	50,000	$	—	$	—	$	50,000
Classified as Marketable Securities										Classified as Marketable Securities
Marketable securities										Marketable securities	$	—	$	—	$	—	$	—
Total	$	330,109	$	1,068	$	(1,374	)	$	329,803	Total	$	468,302	$	32	$	(7,968)	$	460,366

	As of September 30, 2021										As of September 30, 2021
	(In thousands)										(In thousands)
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Classified as Held to Maturity										Classified as Held to Maturity
Commercial notes (due within one year)	$	56,627	$	803	$	-		$	57,430	Commercial notes (due within one year)	$	56,627	$	803	$	—	$	57,430
Commercial notes (due within one through three years)	$	195,595	$	1,151	$	(103	)	$	196,643	Commercial notes (due within one through three years)	$	195,595	$	1,151	$	(103)	$	196,643
Certificate of deposit (due within two years)	$	50,000	$	-	$	-		$	50,000
Certificate of deposit (due within one through two years)										Certificate of deposit (due within one through two years)	$	50,000	$	—	$	—	$	50,000
Classified as Marketable Securities										Classified as Marketable Securities
Marketable securities										Marketable securities	$	127,481	$	—	$	(753)	$	126,728
Total	$	302,222	$	1,954	$	(103	)	$	304,073	Total	$	429,703	$	1,954	$	(856)	$	430,801

Fair Value

As of December 31, 2021

(In thousands)

Cost

Realized
Gains/(Losses)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Marketable securities

$
125,000

$
3,134

$
-

$
(2,124
)

$
126,010

Total

$
125,000

$
3,134

$
-

$
(2,124
)

$
126,010

As of September 30, 2021

(In thousands)

Cost

Realized
Gains/(Losses)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

Marketable securities

$
125,000

$
2,481

$
135

$
(888
)

$
126,728

Total

$
125,000

$
2,481

$
135

$
(888
)

$
126,728

~~Realized gains for marketable securities recorded at fair value consist of dividends received and re-invested into the associated fund.~~

NOTE 5. INTANGIBLE ASSETS

Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition in March 2015. The license agreement associated with the Novartis RNAi asset acquisition is being amortized over the estimated life remaining at the time of acquisition, which was 21 years, and the accumulated amortization of the asset is ~~$1.0~~$1.1 million. The patents associated with the Novartis RNAi asset acquisition are being amortized over the estimated life remaining at the time of acquisition, which was 14 years, and the accumulated

amortization of the assets is ~~$10.6~~$11.4 million. Amortization expense for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was $0.4 million and $0.4 million, respectively. Amortization expense for the nine months ended June 30, 2022 and 2021 was $1.3 million and $1.3 million, respectively. Amortization expense is expected to be ~~$1.3~~$0.4 million for the remainder of fiscal 2022, $1.7 million in 2023, $1.7 million in 2024, $1.7 million in 2025, $1.7 million in 2026 and $5.2 million thereafter.

The following table provides details on the Company’s intangible asset balances:

Intangible
Assets
Subject to
Amortization

(in thousands)

Balance at September 30, 2021

$
13,663

Impairment

-

Amortization

(425
)
Balance at December 31, 2021

$
13,238


	Intangible Assets Subject to Amortization
	(in thousands)
Balance at September 30, 2021	$	13,663
Impairment	—
Amortization	(1,276)
Balance at June 30, 2022	$	12,387

NOTE 6. STOCKHOLDERS’ EQUITY

At ~~December 31, 2021,~~June 30, 2022, the Company had a total of 150,000,000 shares of capital stock authorized for issuance, consisting of 145,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share.

At ~~December 31, 2021,~~ ~~104,798,186~~June 30, 2022, 105,795,456 shares of Common Stock were outstanding. At ~~December 31, 2021, 14,834,548~~June 30, 2022, 13,942,716 shares of Common Stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under Arrowhead’s 2004 Equity Incentive Plan, 2013 Incentive Plan, and 2021 Incentive Plan, as well as for inducement grants made to new employees under Rule 5635(c)(4) of the Nasdaq Listing Rules.

In August 2020, the Company entered into an Open Market Sale Agreement (the “ATM Agreement”), pursuant to which the Company may, from time to time, sell up to $250,000,000 in shares of the Company’s Common Stock through Jefferies LLC, acting as the sales agent and/or principal, in an at-the-market offering. The Company is not required to sell shares under the ATM Agreement. The Company will pay Jefferies LLC a commission of up to 3.0% of the aggregate gross proceeds received from all sales of the common stock under the ATM Agreement. Unless otherwise terminated, the ATM Agreement continues until the earlier of selling all shares available under the ATM Agreement or December 2, 2022. At ~~December 31, 2021, 0~~June 30, 2022, no shares have been sold under the ATM Agreement.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss. There were 0no contingent liabilities recorded as of ~~December 31, 2021.~~

June 30, 2022.

Commitments

On December 20, 2021, the Company completed a purchase of 13 acres of land in the Verona Technology Park in Verona, ~~WI,~~Wisconsin, which is planned to be the site of an approximately ~~140,000~~160,000 square foot drug manufacturing facility and an approximately ~~115,000~~140,000 square foot laboratory and office facility to support process development and analytical activities. Arrowhead intends to invest between $200 million and $250 million into the buildout of the facilities. As part of this acquisition, the Company also entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the TIF district, and will be reimbursed by the City of Verona by future tax increment revenue generated from the developed property. The total amount of funding that City of Verona will pay as reimbursements under the TIF program for these improvements is not guaranteed and will depend on future tax revenues generated from the developed property.

Technology License Commitments

The Company has licensed from third parties the rights to use certain technologies for its research and development activities, as well as in any products the Company may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments. Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon a new drug application and upon certain sales level milestones. These milestone payments could amount to the mid to upper double-digit millions of dollars. During the three and nine months ended ~~December 31,~~June 30, 2022 and 2021, ~~and 2020,~~ the Company did 0tnot reach any milestones. Under certain agreements, the Company may be required to make mid to high single-digit percentage royalty payments based on a percentage of sales of the relevant products.

NOTE 8. LEASES

Leases

In April 2019, the Company entered into a lease for its corporate headquarters in Pasadena, California. The 91 month office building lease between the Company and 177 Colorado Owner, LLC is for approximately 24,000 square feet of office space located at 177 E. Colorado Blvd, Pasadena, California. The increased capacity of this new office space compared to the Company’s prior corporate headquarters will accommodate increased personnel as the Company’s pipeline of drug candidates expands and moves closer to market. Lease payments began on September 30, 2019 and are estimated to total approximately $8.7 million over the term. The lease expires on April 30, 2027. The Company has paid approximately $3.5 million for leasehold improvements, net of tenant improvement allowances. The lease contains an option to renew for 1 term of five years. The exercise of this option was not determined to be reasonably certain and thus was not included in lease liabilities on the Company’s Consolidated Balance Sheet at ~~December 31, 2021.~~June 30, 2022. On October 23, 2020, the Company entered into a lease expansion to add an additional approximately 24,000 square feet of office space at the same location for its corporate headquarters. Lease payments for the expansion began in July 2021 and the lease for the expansion expires in April 2027. The lease payments for the expansion are expected to total $6.9 million. The Company has paid approximately $4.0 million of leasehold improvements, net of tenant improvement allowances, for the lease expansion. ~~The increased capacity of this additional office space~~ ~~compared to the Company’s current corporate headquarters is intended to accommodate increased personnel as the Company’s pipeline of drug candidates continues to expand and move closer to market.~~

In January 2016, the Company entered into a lease for its research facility in Madison, Wisconsin. The lease was for approximately 60,000 square feet of office and laboratory space and had an expiration date of September 30, 2026. The lease was amended in January 2019 and May 2020 to expand the rentable square feet by an additional 40,000 square feet and to extend the lease expiration date to September 30, 2031. Lease payments are estimated to total approximately $26.2 million for the term. The Company incurred approximately $11.0 million of leasehold improvements for the additional 40,000 square feet, net of tenant improvement allowances. The lease contains 2 options to renew for two terms of five years. The exercise of these options were not determined to be reasonably certain and thus was not included in lease liabilities on the Company’s Consolidated Balance Sheet at ~~December 31, 2021.~~June 30, 2022. In November 2020 and December 2020, the Company entered into amendments to expand the rentable square space by an additional 10,743 square feet and these amendments added a total of approximately $1.2 million of lease payments for the remainder of the term.

In March 2020, the Company entered into a sublease agreement for additional research and development facility space in San Diego, California. The Sublease provides additional space needed to accommodate the recent growth of the Company’s personnel and discovery efforts. The Sublease is for approximately 21,000 rentable square feet. The term of the Sublease commenced on April 1, 2020 and will end on January 14, 2023. Sublease payments are estimated to total approximately $2.0 million over the term.

On November 19, 2021, the Company entered into a new lease for a San Diego, California research facility. The 15-year lease is for approximately 144,000 square feet of office and research and development laboratory space to be constructed in San Diego, California. This lease will replace the Company’s current research facility sublease for property located in San Diego, California. The increased capacity of this new facility compared to the Company’s current research facility in San Diego will accommodate increased personnel for the Company’s expanding pipeline of current and future drug candidates. The estimated rent commencement date for the lease is in ~~May~~March 2023,, after construction and leasehold improvements have been completed. The lease payments, which begin on the rent commencement date, will be approximately $119.0 million over the initial 15-year term. The Company also estimates payments for operating expenses to be approximately $3.0 million for the first year of the lease, and these payments will continue throughout the initial 15-year term. The Company expects to pay approximately $31.0 million for leasehold improvements, net of tenant improvement allowances. Pursuant to the lease, within twelve months of the expiration of the initial 15-year term, the

Company has the option to extend the lease for up to 1 additional ten-year term, with certain annual increases in base rent. ~~No lease liabilities have been recorded as of December 31, 2021 as the lease commencement date has not yet occurred.~~

Operating lease cost during the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$1.3~~$3.4 million and ~~$0.9~~$1.6 million, respectively. Operating lease cost during the nine months ended June 30, 2022 and 2021 was $6.0 million and $3.6 million, respectively. Variable lease costs for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was $0.2 million and ~~$0.2~~$0.1 million, respectively. Variable lease costs for the nine months ended June 30, 2022 and 2021 was $0.5 million and $0.6 million, respectively. There was 0no short-term lease cost during the three and nine months ended ~~December 31, 2021~~June 30, 2022 and ~~2020.~~

2021.

The following table presents ~~maturities~~payments of operating lease liabilities on an undiscounted basis as of ~~December 31, 2021:~~

June 30, 2022:

	(in thousands)
2022	$	3,685
					(in thousands)
2022 (remainder of fiscal year)				2022 (remainder of fiscal year)	$	1,309
2023		4,786		2023	5,802
2024		4,621		2024	8,094
2025		4,749		2025	11,800
2026		5,050		2026	12,313
2027 and thereafter		13,200		2027 and thereafter	114,109
Total	$	36,091		Total	$	153,427
Less imputed interest	$	(10,776	)	Less imputed interest	$	(72,313)
Total operating lease liabilities (includes current portion)	$	25,315		Total operating lease liabilities (includes current portion)	$	81,114

Cash paid for the amounts included in the measurement of the operating lease liabilities on the Company’s Consolidated Balance Sheet and included in Other changes in operating assets and liabilities within cash flows from operating activities on the Company’s Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~December 31~~,June 30, 2022 and 2021 ~~and 2020~~ was ~~$1.0~~$3.4 million and ~~$0.7~~$2.2 million, respectively. The weighted-average remaining lease term and weighted-average discount rate for all leases as of ~~December 31, 2021~~June 30, 2022 was ~~7.8~~7.3 years and 8.5%, respectively.

NOTE 9. STOCK-BASED COMPENSATION

Arrowhead has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of ~~December 31, 2021, 376,301~~June 30, 2022, 216,607 and ~~4,904,814~~4,114,999 shares, respectively, of Arrowhead’s Common Stock are reserved for the grant of stock options, stock appreciation rights, and restricted stock unit awards to employees, consultants and others. No further grants may be made under the 2004 Equity Incentive Plan. As of ~~December 31, 2021,~~June 30, 2022, there were options granted and outstanding to purchase ~~376,301~~216,607 and ~~1,948,814~~1,806,987 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were ~~2,956,000~~2,308,012 restricted stock units granted and outstanding under the 2013 Incentive Plan. ~~Also, as~~As of ~~December 31, 2021,~~June 30, 2022, there were ~~889,890~~816,248 shares reserved for options and ~~651,000~~682,500 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans. ~~Under the 2021 Incentive Plan, as~~As of ~~December 31, 2021,~~June 30, 2022, there were 3,000 shares of Common Stock reserved for options and ~~76,400~~1,507,267 shares of Common Stock reserved for restricted stock units ~~were~~ granted and outstanding under the 2021 Incentive Plan. As of ~~December 31, 2021,~~June 30, 2022, the total number of ~~authorized~~ shares available under the 2021 Incentive Plan was ~~8,012,543~~6,627,845 shares, which includes ~~91,943~~119,612 shares that were forfeited under the 2013 Incentive Plan.

Stock Options

The following table summarizes information about stock options:


	Number of Options Outstanding			Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value			Number of Options Outstanding	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Balance at September 30, 2021		3,456,239		$	19.60				Balance at September 30, 2021	3,456,239	$	19.60
Granted		-			-				Granted	—	—
Cancelled		(30,420	)	35.57					Cancelled	(106,801)	43.68
Exercised		(207,814	)	10.32					Exercised	(506,596)	8.45
Balance at December 31, 2021		3,218,005		$	20.05	5.4 years	$	149,311,699
Exercisable at December 31, 2021		2,460,188		$	13.69	4.6 years	$	129,520,403
Balance at June 30, 2022									Balance at June 30, 2022	2,842,842	$	20.60	5.1 years	$	55,434,252
Exercisable at June 30, 2022									Exercisable at June 30, 2022	2,370,089	$	16.14	4.6 years	$	52,941,990

Stock-based compensation expense related to stock options for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$3.0~~$2.6 million and ~~$3.1~~$3.2 million, respectively. Stock-based compensation expense related to stock options for the nine months ended June 30, 2022 and 2021 was $8.3 million and $9.6 million, respectively. For non-qualified stock options, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The grant date fair value of the options granted by the Company for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was $0 and ~~$6.8~~$0.9 million, respectively.

The grant date fair value of the options granted by the Company for the nine months ended June 30, 2022 and 2021 was $0 and $9.0 million, respectively.

The intrinsic value of the options exercised during the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$12.5~~$1.6 million and ~~$32.0~~$10.2 million, respectively.

The intrinsic value of the options exercised during the nine months ended June 30, 2022 and 2021 was $24.9 million and $63.0 million, respectively.

As of ~~December 31, 2021,~~June 30, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of ~~$22.4~~$14.9 million will be recognized in the Company’s results of operations over a weighted average period of ~~2.2~~ ~~years~~.

1.7 years.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The assumptions used to value stock options are as follows:

Three Months Ended December 31,

Nine Months Ended June 30,

2021

2020

2022

2021

Dividend yield

N/A

Dividend yield

N/A

—

Risk-free interest rate

N/A

0.4 – 0.6%

Risk-free interest rate

N/A

0.4% - 1.1%

Volatility

N/A

90.0 – 90.4%

Volatility

N/A

86% - 90.4%

Expected life (in years)

N/A

6.25

Expected life (in years)

N/A

6.25

Weighted average grant date fair value per share of options granted

N/A

47.34

Weighted average grant date fair value per share of options granted

N/A

48.64

The dividend yield is 0zero as the Company currently does not pay a dividend.

The risk-free interest rate is based on that of the U.S. Treasury bond.

Volatility is estimated based on volatility average of the Company’s Common Stock price.

Restricted Stock Units

Restricted stock units (“RSUs”), including time-based, market condition-based, and performance condition-based awards, have been granted under the Company’s 2013 Incentive Plan, 2021 Incentive Plan, and as inducements grants granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules. At vesting, each outstanding RSU will be exchanged for one share of the Company’s Common Stock. RSU awards generally vest subject to the satisfaction of service requirements or the satisfaction of both service requirements and achievement of certain performance targets.

The following table summarizes the activity of the Company’s RSUs:


	Number of RSUs			Weighted- Average Grant Date Fair Value			Number of RSUs	Weighted- Average Grant Date Fair Value Per Share
Unvested at September 30, 2021		3,731,850		$	60.82	Unvested at September 30, 2021	3,831,850	$	61.24
Granted		122,500			62.60	Granted	1,691,367	56.73
Vested		(263,700	)		61.11	Vested	(962,188)	49.10
Forfeited		(7,250	)		83.54	Forfeited	(95,625)	69.32
Unvested at December 31, 2021		3,583,400		$	60.82
Unvested at June 30, 2022						Unvested at June 30, 2022	4,465,404	$	61.97

During the three months ended ~~December 31,~~June 30, 2022 and 2021, ~~and 2020,~~ the Company recorded ~~$21.5~~$33.7 million and ~~$5.0~~$15.4 million of expense related to RSUs, respectively. During the nine months ended June 30, 2022 and 2021, the Company recorded $83.4 million and $32.5 million of expense related to RSUs, respectively. Such expense is included in stock-based compensation expense in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). For RSUs, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

For RSUs, the grant date fair value of the award is based on the Company’s closing stock price at the grant date, with consideration given to the probability of achieving performance conditions for performance-based awards. The grant date fair value of the RSUs granted by the Company for the three months ended ~~December 31,~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$7.7~~$42.5 million and ~~$7.4~~$3.1 million, respectively.

The grant date fair value of the RSUs granted by the Company for the nine months ended June 30, 2022 and 2021 was $95.2 million and $112.1 million, respectively.

As of ~~December 31, 2021,~~June 30, 2022, the pre-tax compensation expense for all unvested RSUs in the amount of ~~$139.7~~$190.3 million will be recognized in the Company’s results of operations over a weighted average period of ~~2.6~~2.7 years.

During the three months ended December 31, 2021, certain performance condition-based awards were modified to either add an additional market condition component, or to replace performance conditions with market conditions entirely. The Company assessed the modification date fair value based on a monte carlo simulation model. ~~The fair value of market condition-based awards is expensed ratably over the service period and is not adjusted for actual achievement.~~

NOTE 10. FAIR VALUE MEASUREMENTS

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table summarizes fair value measurements at ~~December 31, 2021~~June 30, 2022 and September 30, 2021 for assets and liabilities measured at fair value on a recurring basis:

~~December 31, 2021:~~

Level 1

Level 2

Level 3

Total

(in thousands)

Cash and cash equivalents

$
91,587

$
-

$
-

$
91,587

Marketable securities

$
126,010

$
-

$
-

$
126,010

Short-term investments (held to maturity)

$
-

$
113,224

$
-

$
113,224

Long-term investments (held to maturity)

$
-

$
216,579

$
-

$
216,579

Contingent consideration

$
-

$
-

$
-

$
-

June 30, 2022:


	Level 1		Level 2		Level 3		Total
	(in thousands)
Classified as Cash and cash equivalents
Commercial Notes	$	—	$	25,336	$	—	$	25,336
Classified as Marketable Securities
Marketable securities	$	—	$	—	$	—	$	—
Classified as Held to Maturity
Short-term investments	$	—	$	225,490	$	—	$	225,490
Long-term investments	$	—	$	159,540	$	—	$	159,540
Certificate of deposits	$	50,000	$	—	$	—	$	50,000
Classified as Contingent Consideration
Contingent consideration	$	—	$	—	$	—	$	—

September 30, ~~2021~~:

Level 1

Level 2

Level 3

Total

(in thousands)

Cash and cash equivalents

$
184,434

$
-

$
-

$
184,434

Marketable securities

$
126,728

$
-

$
-

$
126,728

Short-term investments (held to maturity)

$
-

$
57,430

$
-

$
57,430

Long-term investments (held to maturity)

$
-

$
246,643

$
-

$
246,643

Contingent consideration

$
-

$
-

$
-

$
-

2021:


	Level 1		Level 2		Level 3		Total
	(in thousands)
Classified as Marketable Securities
Marketable securities	$	126,728	$	—	$	—	$	126,728
Classified as Held to Maturity
Short-term investments	$	—	$	57,430	$	—	$	57,430
Long-term investments	$	—	$	196,643	$	—	$	196,643
Certificate of deposit	$	50,000	$	—	$	—	$	50,000
Classified as Contingent Consideration
Contingent consideration	$	—	$	—	$	—	$	—

NOTE 11. SUBSEQUENT EVENTS

None.

~~ITEM 2.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “project,” “could,” “estimate,” “target,” “forecast,” or “continue” or the negative of these words or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, or other characterizations of future events or circumstances are forward-looking statements.

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately, and many of which are beyond our control. In addition, many of these risks and uncertainties may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. As such, our actual results may differ materially from those expressed in any forward-looking statements. Readers should carefully review the factors identified in our most recent Annual Report on Form 10-K under the caption “Risk Factors” as well as the additional risks and uncertainties described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including this Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2021.~~June 30, 2022. In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Description of Business

Overview

Arrowhead Pharmaceuticals, Inc. develops medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company’s pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ~~ARO-ENaC~~ARO-ENaC2 for cystic fibrosis, ~~ARO-HIF2 for renal cell carcinoma,~~ ARO-DUX4 for facioscapulohumeral muscular dystrophy, ~~ARO-LUNG2 for chronic obstructive pulmonary disorder,~~ ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens, ARO-C3 for complement mediated diseases, ~~and~~ ARO-RAGE and ARO-MUC5AC for various muco-obstructive or inflammatory pulmonary ~~conditions. ARO-HSD~~conditions and ARO-MMP7 for idiopathic pulmonary fibrosis. ARO-HSD for liver disease was out-licensed to Glaxosmithkline Intellectual Property (No. 3) Limited (“GSK”) in November 2021. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ~~ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).~~ JNJ-75220795 (ARO-JNJ1) is being developed by Janssen as a potential treatment for patients with non-alcoholic steatohepatitis (NASH).ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc. (“Takeda”) in October 2020. JNJ-3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 2018. Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016.

While the Company believes that initial ARO-HIF2 Phase 1 clinical data provides proof of concept for the ability to deliver siRNA to RCC tumors, the Company has decided not to pursue further clinical development of ARO-HIF2 based on a number of factors including the evolving competitive landscape for HIF2 inhibitors.