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ARWR Arrowhead Pharmaceuticals

Filed: 7 May 20, 4:12pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-38042

 

ARROWHEAD PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-0408024

(State of incorporation)

 

(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)

 

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      No  

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      No  

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.  

 

Securities registered pursuant to Section 12(b) of the 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock outstanding as of May 5, 2020 was 101,773,274.

 

 

 


 

 

 

Page(s)

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS (unaudited)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

Consolidated Statement of Stockholders’ Equity

3

 

 

Consolidated Statements of Cash Flows

5

 

 

Notes to Consolidated Financial Statements

6

 

 

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

16

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

 

 

ITEM 4. CONTROLS AND PROCEDURES

26

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

27

 

 

ITEM 1A. RISK FACTORS

27

 

 

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

28

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

28

 

 

ITEM 4. MINE SAFETY DISCLOSURES

28

 

 

ITEM 5. OTHER INFORMATION

28

 

 

ITEM 6. EXHIBITS

29

 

 

SIGNATURE

30

 

 

 

 


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Arrowhead Pharmaceuticals, Inc.

Consolidated Balance Sheets

 

 

(unaudited)

March 31, 2020

 

 

September 30, 2019

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

256,650,727

 

 

$

221,804,128

 

Accounts receivable

 

1,265,771

 

 

 

661,361

 

Prepaid expenses

 

3,062,333

 

 

 

3,317,999

 

Other current assets

 

2,536,284

 

 

 

2,563,435

 

Short term investments

 

50,959,058

 

 

 

36,899,894

 

TOTAL CURRENT ASSETS

 

314,474,173

 

 

 

265,246,817

 

Property and equipment, net

 

29,362,741

 

 

 

23,214,899

 

Intangible assets, net

 

16,213,366

 

 

 

17,063,580

 

Long term investments

 

190,618,075

 

 

 

44,175,993

 

Right-of-use assets

 

10,263,197

 

 

 

-

 

Other assets

 

144,150

 

 

 

144,148

 

TOTAL ASSETS

$

561,075,702

 

 

$

349,845,437

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

$

13,417,692

 

 

$

7,649,921

 

Accrued expenses

 

4,419,233

 

 

 

6,504,729

 

Accrued payroll and benefits

 

1,616,090

 

 

 

4,955,887

 

Lease liabilities

 

688,454

 

 

 

-

 

Deferred rent

 

-

 

 

 

173,952

 

Deferred revenue

 

33,174,765

 

 

 

77,769,629

 

Other current liabilities

 

17,263

 

 

 

16,561

 

TOTAL CURRENT LIABILITIES

 

53,333,497

 

 

 

97,070,679

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

14,178,735

 

 

 

-

 

Deferred rent, net of current portion

 

-

 

 

 

3,703,364

 

Deferred revenue, net of current portion

 

-

 

 

 

5,035,142

 

TOTAL LONG-TERM LIABILITIES

 

14,178,735

 

 

 

8,738,506

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Arrowhead Pharmaceuticals, Inc. stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 145,000,000 shares authorized; 101,748,107 and 95,506,271 shares

   issued and outstanding as of March 31, 2020 and September 30, 2019, respectively

 

194,117

 

 

 

187,876

 

Additional paid-in capital

 

936,353,920

 

 

 

664,086,155

 

Accumulated other comprehensive income (loss)

 

(629,114

)

 

 

(391,624

)

Accumulated deficit

 

(441,800,265

)

 

 

(419,290,967

)

Total Arrowhead Pharmaceuticals, Inc. stockholders' equity

 

494,118,658

 

 

 

244,591,440

 

Noncontrolling interest

 

(555,188

)

 

 

(555,188

)

TOTAL STOCKHOLDERS’ EQUITY

 

493,563,470

 

 

 

244,036,252

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

561,075,702

 

 

$

349,845,437

 

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

 

 

 

1


Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

REVENUE

 

$

23,528,853

 

 

$

48,148,275

 

 

$

52,983,433

 

 

$

82,806,171

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

29,443,335

 

 

 

20,798,628

 

 

 

52,816,951

 

 

 

38,370,671

 

General and administrative expenses

 

 

16,325,773

 

 

 

5,338,955

 

 

 

27,260,330

 

 

 

11,478,664

 

TOTAL OPERATING EXPENSES

 

 

45,769,108

 

 

 

26,137,583

 

 

 

80,077,281

 

 

 

49,849,335

 

OPERATING INCOME (LOSS)

 

 

(22,240,255

)

 

 

22,010,692

 

 

 

(27,093,848

)

 

 

32,956,836

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

2,404,685

 

 

 

1,886,290

 

 

 

4,584,550

 

 

 

2,977,399

 

TOTAL OTHER INCOME (EXPENSE)

 

 

2,404,685

 

 

 

1,886,290

 

 

 

4,584,550

 

 

 

2,977,399

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(19,835,570

)

 

 

23,896,982

 

 

 

(22,509,298

)

 

 

35,934,235

 

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

NET INCOME (LOSS)

 

 

(19,835,570

)

 

 

23,896,982

 

 

 

(22,509,298

)

 

 

35,934,235

 

NET INCOME (LOSS) PER SHARE - BASIC

 

$

(0.20

)

 

$

0.25

 

 

$

(0.23

)

 

$

0.39

 

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

(0.20

)

 

$

0.24

 

 

$

(0.23

)

 

$

0.37

 

Weighted average shares outstanding - basic

 

 

101,653,136

 

 

 

94,155,407

 

 

 

99,359,140

 

 

 

92,623,615

 

Weighted average shares outstanding - diluted

 

 

101,653,136

 

 

 

98,082,644

 

 

 

99,359,140

 

 

 

97,214,546

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(433,564

)

 

 

(28,162

)

 

 

(237,490

)

 

 

(50,342

)

COMPREHENSIVE INCOME (LOSS)

 

$

(20,269,134

)

 

$

23,868,820

 

 

$

(22,746,788

)

 

$

35,883,893

 

 

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

 

 

 

2


Arrowhead Pharmaceuticals, Inc.

Consolidated Statement of Stockholders’ Equity

(unaudited)

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at December 31, 2018

 

 

92,591,457

 

 

$

184,961

 

 

$

647,142,565

 

 

$

(43,744

)

 

$

(475,228,563

)

 

$

(555,188

)

 

$

171,500,031

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,601,348

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,601,348

 

Exercise of stock options

 

 

535,915

 

 

 

536

 

 

 

2,669,501

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,670,037

 

Common stock - restricted stock units vesting

 

 

1,538,346

 

 

 

1,538

 

 

 

(1,538

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(28,162

)

 

 

-

 

 

 

-

 

 

 

(28,162

)

Net income (loss) for the three months ended March 31, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,896,982

 

 

 

-

 

 

 

23,896,982

 

Balance at March 31, 2019

 

 

94,665,718

 

 

$

187,035

 

 

$

652,411,876

 

 

$

(71,906

)

 

$

(451,331,581

)

 

$

(555,188

)

 

$

200,640,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at December 31, 2019

 

 

101,111,797

 

 

$

193,481

 

 

$

922,050,595

 

 

$

(195,550

)

 

$

(421,964,695

)

 

$

(555,188

)

 

$

499,528,643

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

12,971,702

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,971,702

 

Exercise of stock options

 

 

214,239

 

 

 

214

 

 

 

1,329,810

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,330,024

 

Common stock - restricted stock units vesting

 

 

422,071

 

 

 

422

 

 

 

(422

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

-

 

 

 

-

 

 

 

2,235

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,235

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(433,564

)

 

 

-

 

 

 

-

 

 

 

(433,564

)

Net income (loss) for the three months ended March 31, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,835,570

)

 

 

-

 

 

 

(19,835,570

)

Balance at March 31, 2020

 

 

101,748,107

 

 

$

194,117

 

 

$

936,353,920

 

 

$

(629,114

)

 

$

(441,800,265

)

 

$

(555,188

)

 

$

493,563,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2018

 

 

88,505,302

 

 

$

180,875

 

 

$

582,902,694

 

 

$

(21,564

)

 

$

(487,265,816

)

 

$

(555,188

)

 

$

95,241,001

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

5,318,882

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,318,882

 

Exercise of stock options

 

 

702,242

 

 

 

702

 

 

 

3,674,029

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,674,731

 

Common stock - restricted stock units vesting

 

 

2,197,305

 

 

 

2,197

 

 

 

(2,197

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

3,260,869

 

 

 

3,261

 

 

 

60,518,468

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60,521,729

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50,342

)

 

 

-

 

 

 

-

 

 

 

(50,342

)

Net income (loss) for the six months ended March 31, 2019

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,934,235

 

 

 

-

 

 

 

35,934,235

 

Balance at March 31, 2019

 

 

94,665,718

 

 

$

187,035

 

 

$

652,411,876

 

 

$

(71,906

)

 

$

(451,331,581

)

 

$

(555,188

)

 

$

200,640,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Amount ($)

 

 

Additional Paid-In Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Non-controlling Interest

 

 

Totals

 

Balance at September 30, 2019

 

 

95,506,271

 

 

$

187,876

 

 

$

664,086,155

 

 

$

(391,624

)

 

$

(419,290,967

)

 

$

(555,188

)

 

$

244,036,252

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

17,463,455

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,463,455

 

Exercise of stock options

 

 

686,432

 

 

 

686

 

 

 

4,330,891

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,331,577

 

Common stock - restricted stock units vesting

 

 

955,404

 

 

 

955

 

 

 

(955

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

4,600,000

 

 

 

4,600

 

 

 

250,474,374

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

250,478,974

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(237,490

)

 

 

-

 

 

 

-

 

 

 

(237,490

)

Net income (loss) for the six months ended March 31, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22,509,298

)

 

 

-

 

 

 

(22,509,298

)

Balance at March 31, 2020

 

 

101,748,107

 

 

$

194,117

 

 

$

936,353,920

 

 

$

(629,114

)

 

$

(441,800,265

)

 

$

(555,188

)

 

$

493,563,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

3


 

 

4


Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended March 31,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(22,509,298

)

 

$

35,934,235

 

Stock-based compensation

 

 

17,463,455

 

 

 

5,318,882

 

Depreciation and amortization

 

 

2,631,472

 

 

 

2,353,319

 

Amortization/(accretion) of note premiums

 

 

419,212

 

 

 

330,229

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(604,410

)

 

 

(13,094,965

)

Prepaid expenses and other current assets

 

 

46,520

 

 

 

(1,440,287

)

Deferred revenue

 

 

(49,630,006

)

 

 

120,622,138

 

Accounts payable

 

 

5,767,770

 

 

 

1,256,092

 

Accrued expenses

 

 

(5,424,591

)

 

 

(2,340,651

)

Other

 

 

725,481

 

 

 

(240,737

)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

(51,114,395

)

 

 

148,698,255

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7,929,100

)

 

 

(946,788

)

Purchases of marketable securities

 

 

(180,523,424

)

 

 

(90,266,001

)

Proceeds from sale of marketable securities

 

 

19,602,967

 

 

 

12,239,219

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

(168,849,557

)

 

 

(78,973,570

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Principal payments on notes payable

 

 

-

 

 

 

(2,415,150

)

Proceeds from the exercises of stock options

 

 

4,331,577

 

 

 

3,674,731

 

Proceeds from the issuance of common stock

 

 

250,478,974

 

 

 

60,521,729

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

254,810,551

 

 

 

61,781,310

 

NET INCREASE (DECREASE) IN CASH

 

 

34,846,599

 

 

 

131,505,995

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

221,804,128

 

 

 

30,133,213

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

256,650,727

 

 

$

161,639,208

 

Supplementary disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

-

 

 

$

(27,437

)

Income Taxes Paid

 

$

-

 

 

$

(2,400

)

 

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

 

 

5


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 collectively to Arrowhead Madison Inc. (“Arrowhead Madison”), Arrowhead Australia Pty Ltd (“Arrowhead Australia”) and Ablaris Therapeutics, Inc. (“Ablaris”), (4) the term “Common Stock” refers to Arrowhead’s Common Stock, (5) the term “Preferred Stock” refers to Arrowhead’s Preferred Stock  and (6) the term “Stockholder(s)” refers to the holders of Arrowhead 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, or 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-AAT for liver disease associated with alpha-1 antitrypsin deficiency (AATD), ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, and ARO-LUNG2 as a candidate to treat chronic obstructive pulmonary disease (COPD). ARO-JNJ1 is being developed for an undisclosed liver-expressed target under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).  ARO-HBV (JNJ-3989) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.  ARO-LPA (AMG 890) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016.

Arrowhead operates a lab facility in Madison, Wisconsin, where the Company’s research and development activities, including the development of RNAi therapeutics, are based. The Company’s principal executive offices are located in Pasadena, California. During the three months ended March 31, 2020, the Company entered into a sublease for additional research and development facility space in San Diego, California as discussed further in Note 8 below.

 

During the first half of fiscal 2020, the Company has continued to develop its pipeline and partnered candidates.  The Company has began dosing in an adaptive design phase 2/3 trial, called SEQUOIA, with the potential to serve as a pivotal registration study of ARO-AAT.  The Company also began dosing in its ARO-AAT 2002 study, a pilot open-label, multi-dose Phase 2 study to assess changes in novel histological activity scale in response to ARO-AAT over time in patients with alpha-1 antitrypsin deficiency associated liver disease.  The Company also presented new clinical data on its two cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, in two late-breaking oral presentations at the American Heart Association Scientific Sessions 2019.  The Company also filed an IND to begin a phase 1b study of ARO-HIF2, filed a CTA to begin a phase 1 study of ARO-HSD, and filed a CTA to begin a phase 1 study of ARO-ENaC.  

The Company’s partnered candidates under its collaboration agreements with Janssen and Amgen also continue to progress.  Janssen began dosing patients in a phase 2b triple combination study called REEF-1, designed to enroll up to 450 patients with chronic hepatitis B infection, and in connection with the start of this study Arrowhead earned a $25 million milestone payment under the License Agreement (“Janssen License Agreement”).  Janssen has also nominated the first of 3 potential candidates under the Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”), ARO-JNJ1, and the Company is currently performing discovery, optimization and preclinical research and development for this candidate.  Under the terms of the Janssen agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock, two $25 million milestone payments and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the 3 additional targets covered under the Janssen Collaboration Agreement.  The Company is further eligible to receive tiered royalties up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  The Company’s collaboration agreement with Amgen for AMG 890 (ARO-LPA), (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), continues to progress.  The Company has received $35 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, a $10 million milestone payment, and may receive up to $420 million in development, regulatory and sales milestone payments.  The Company is eligible to receive up to low double-digit royalties for sales of products under the AMG 890 (ARO-LPA) Agreement.  

The revenue recognition for these collaboration agreements is discussed further in Note 2 below.  

6


 

The Company is actively monitoring the novel coronavirus (“COVID-19”) situation. The financial results for the three and six months ended March 31, 2020 were not significantly impacted by COVID-19. The Company has paused enrollment in its two ARO-AAT studies: SEQUOIA and the ARO-AAT 2002 study, but now is working with sites and investigators to begin the process of resuming screening and enrollment. Patients already enrolled in these studies continue to be dosed per protocol and continue to come in for their follow up visits. Additional delays have occurred in the Company’s earlier stage programs, but we do not expect a material impact to any program’s anticipated timelines. Additionally, the Company’s operations at its research and development facility in Madison, WI and its corporate headquarters in Pasadena, CA have continued to operate with limited impact, other than for enhanced safety measures including work from home policies.  

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America, which contemplate the continuation of the Company as a going concern.  Historically, the Company’s primary source of financing has been through the sale of its securities. Research and development activities have required significant capital investment since the Company’s inception. The Company expects its operations to continue to require cash investment to pursue its research and development goals, including clinical trials and related drug manufacturing. 

At March 31, 2020 the Company had $256.7 million in cash and cash equivalents (including $1.8 million in restricted cash), $51.0 million in short-term investments, and $190.6 million in long-term investments to fund operations.  During the six months ended March 31, 2020, the Company’s cash and investments balance increased by $195.4 million, which was primarily the result of the December 2019 securities offering that generated $250.5 million in net cash proceeds for the Company, as discussed further in Note 6 below.  These cash inflows were partially offset by cash outflows primarily related to operating activities.        

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, except as a result of the Financial Accounting Standards Board (FASB)’s Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), as discussed below.

Leases — The Company determines whether a contract is, or contains, a lease at inception. The Company classifies each of its  leases as operating or financing considering factors such as the length of the lease term, the present value of the lease payments, the nature of the asset being leased, and the potential for ownership of the asset to transfer during the lease term. Leases with terms greater than one-year are recognized on the Consolidated Balance Sheets as Right-of-use assets and Lease liabilities and are measured at the present value of the fixed payments due over the expected lease term less the present value of any incentives, rebates or abatements expected to be received from the lessor. Options to extend a lease are typically excluded from the expected lease term as the exercise of the option is typically not reasonably certain.  The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis an amount equal to the lease payments over a similar term and in a similar economic environment. The Company records expense to recognize fixed lease payments on a straight-line basis over the expected lease term. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are expensed as incurred.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-02, Leases (Topic ASC 842).  Under ASC 842, lessees are required to recognize a right-of-use asset and a right-of-use lease liability for virtually all leases other than those that meet the definition of a short-term lease. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern (similar to current capital leases).  The Company adopted this standard effective October 1, 2019 and elected the package of three practical expedients that permits an entity to a) not reassess whether expired or existing contracts contain leases, b) not reassess lease classification for existing or expired leases, and c) not consider whether previously capitalized initial direct costs would be appropriate under the new standard.  At March 31, 2020, the Company has recorded right-of-use assets of $10.3 million and right-of-use liabilities of $14.9 million on its Consolidated Balance Sheets for its research and development facility lease in Madison, Wisconsin, and its corporate headquarters lease in Pasadena, California, as discussed further in Note 8 below.  The adoption of this standard did not have a material impact on the Company’s Consolidated Statement of Comprehensive Income (Loss) and the Company’s Consolidated Statement of Cash Flows.  

In November 2018, the FASB issued ASU No. 2018-18 Collaborative Arrangements (Topic 808).  This update provides clarification on the interaction between Revenue Recognition (Topic 606) and Collaborative Arrangements (Topic 808) including the

7


alignment of unit of account guidance between the two topics. ASU 2018-18 becomes effective for the Company in the first quarter of fiscal 2021 with early adoption permitted.  The Company does not expect the adoption of this update to have a material effect on its Consolidated Financial Statements.

 

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 Inc., a Delaware corporation (“Amgen”). Under one of the license agreements (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel, RNAi 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 other license agreement (the “First Collaboration and License Agreement” or “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. In both agreements, Amgen is wholly responsible for clinical development and commercialization. Under the terms of the agreements taken together, the Company has received $35 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and a $10 million milestone payment, and may receive up to $420 million in 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 AMG 890 (ARO-LPA) 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 substantially completed its performance obligations under the AMG 890 (ARO-LPA) Agreement and the ARO-AMG1 Agreement.  Future milestones and royalties achieved will be recognized in their entirety when earned.  During the three and six months ended March 31, 2020 and 2019, the Company recognized $0 and $0.3 million of Revenue associated with its agreements with Amgen, respectively. As of March 31, 2020, there were $0 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 (“Janssen License Agreement”) and a Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”) with Janssen Pharmaceuticals, Inc. (“Janssen”) part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a Stock Purchase Agreement (“JJDC Stock Purchase Agreement”) with Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”), a New Jersey corporation.  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 potentially curative therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV), Janssen will be wholly responsible for clinical development and commercialization.  Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates.  These candidates are subject to certain restrictions and will not include candidates in the Company’s current pipeline.  The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, sufficient to allow the filing of a U.S. Investigational New Drug application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be wholly responsible for clinical development and commercialization of each optioned candidate.  Under the terms of the agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock under the JJDC Stock Purchase Agreement, and two $25 million milestone payments, and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the 3 additional targets covered under the Janssen Collaboration Agreement.  The Company is further eligible to receive tiered royalties up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  

The Company has evaluated these agreements in accordance with the new revenue recognition standard that became effective for the Company on October 1, 2018.  The adoption of the new revenue standard did not have a material impact on the balances reported when evaluated under the superseded revenue standard.  At the inception of these agreements, the Company has 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 ongoing 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

8


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 will be accounted for if and when it is exercised.

The Company determined the transaction price totaled approximately $252.5 million which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, the two $25 million milestone payments earned and estimated payments for reimbursable Janssen R&D services to be performed.  The Company has allocated the total $252.5 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.  This revenue will be recognized using a proportional performance method (based on actual labor hours versus estimated total labor hours) beginning in October 2018 and ending as the Company’s efforts in overseeing the ongoing phase 1 / 2 clinical trial are completed.  During the three months ended March 31, 2020 and 2019, the Company recognized approximately $22.2 million and $47.9 million of Revenue associated with its agreements with Janssen and JJDC, respectively. During the six months ended March 31, 2020 and 2019, the Company recognized approximately $50.9 million and $82.5 million of Revenue associated with its agreements with Janssen and JJDC, respectively. As of March 31, 2020, there were $0 in contract assets recorded as accounts receivable, and $33.2 million of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.  The $33.2 million of current deferred revenue is driven by the upfront payment, the premium paid by JJDC for its equity investment in the Company, and the two $25 million milestone payments earned, net of revenue recognized to date.

Janssen has also selected the first of the three targets under the Janssen Collaboration Agreement, now referred to as ARO-JNJ1, and the Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1.  All costs and labor hours spent by the Company will be entirely funded by Janssen.  During the three months ended March 31, 2020 and 2019, the Company recognized approximately $1.4 million and $0 of Revenue associated with its efforts on the ARO-JNJ1 candidate, respectively. During the six months ended March 31, 2020 and 2019, the Company recognized $2.1 million and $0 of Revenue associated with these efforts on the ARO-JNJ1 candidate, respectively. As of March 31, 2020, there were $1.3 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.                                                                       

 

NOTE 3. PROPERTY AND EQUIPMENT

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

 

 

 

March 31, 2020

 

 

September 30, 2019

 

Computers, office equipment and furniture

 

$

635,769

 

 

$

637,577

 

Research equipment

 

 

18,098,960

 

 

 

12,932,304

 

Software

 

 

293,189

 

 

 

147,254

 

Leasehold improvements

 

 

24,187,465

 

 

 

21,579,415

 

Total gross fixed assets

 

 

43,215,383

 

 

 

35,296,550

 

Less:   Accumulated depreciation and amortization

 

 

(13,852,642

)

 

 

(12,081,651

)

Property and equipment, net

 

$

29,362,741

 

 

$

23,214,899

 

 

Depreciation and amortization expense for property and equipment for the three months ended March 31, 2020 and 2019 was $946,481 and $750,860, respectively.  Depreciation and amortization expense for property and equipment for the six months ended March 31, 2020 and 2019 was $1,781,258 and $1,503,105, respectively.

 

NOTE 4. INVESTMENTS

The Company invests a portion of its excess cash balances in short-term and long-term debt securities.  Investments at March 31, 2020 consisted of corporate bonds with maturities remaining of less than or equal to 36 months.  The Company may also invest excess cash balances in certificates of deposits, money market accounts, government-sponsored enterprise securities, corporate bonds and/or commercial paper.  The Company accounts for its investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities.  At March 31, 2020, all investments were classified as held-to-maturity securities.

9


The following tables summarize the Company’s short-term and long-term investments as of March 31, 2020, and September 30, 2019.

 

 

 

As of March 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Commercial notes (due within one year)

 

$

50,959,058

 

 

$

264,194

 

 

$

(37,786)

 

 

$

51,185,466

 

Commercial notes (due within one through three years)

 

$

190,618,075

 

 

$

1,735,812

 

 

$

(1,481,115)

 

 

$

190,872,772

 

Total

 

$

241,577,133

 

 

$

2,000,006

 

 

$

(1,518,901)

 

 

$

242,058,238‬

 

 

 

 

As of September 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Commercial notes (due within one year)

 

$

36,899,894

 

 

$

222,584

 

 

$

 

 

$

37,122,478

 

Commercial notes (due within one through three years)

 

$

44,175,993

 

 

$

875,258

 

 

$

 

 

$

45,051,251

 

Total

 

$

81,075,887

 

 

$

1,097,842

 

 

$

 

 

$

82,173,729

 

 

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 approximately $754,394.  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 approximately $7,889,455.  Amortization expense for the three months ended March 31, 2020 and 2019 was $425,107 and $425,108, respectively. Amortization expense for the six months ended March 31, 2020 and 2019 was $850,214 and $850,215, respectively. Amortization expense is expected to be $850,215 for the remainder of fiscal 2020, $1,700,429 in 2021, $1,700,429 in 2022, $1,700,429 in 2023, $1,700,429 in 2024, and $8,561,435 thereafter.

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

 

 

 

Intangible assets

subject to

amortization

 

Balance at September 30, 2019

 

$

17,063,580

 

Impairment

 

 

 

Amortization

 

 

(850,214

)

Balance at March 31, 2020

 

$

16,213,366

 

 

NOTE 6. STOCKHOLDERS’ EQUITY

At March 31, 2020, 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 March 31, 2020, 101,748,107 shares of Common Stock were outstanding.  At March 31, 2020, 8,474,561 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 and 2013 Incentive Plan, as well as for inducement grants made to new employees.

10


In December 31, 2019 the Company sold 4,600,000 shares of its Common Stock in a public offering at a price of $58.00 per share.  The aggregate purchase price paid by the investors for the Common Stock was $266.8 million, and the Company received net proceeds of $250.5 million after deducting advisory fees and offering expenses.  

                   

NOTE 7. COMMITMENTS AND CONTINGENCIES

Litigation

On occasion, 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 0 contingent liabilities recorded as of March 31, 2020.

Purchase Commitments

In the normal course of business, the Company enters into various purchase commitments for the manufacture of drug components, for toxicology studies, and for clinical studies.  As of March 31, 2020, these future commitments were estimated at approximately $72.2 million, of which approximately $40.0 million is expected to be incurred in fiscal 2020, and $32.2 million is expected to be incurred beyond fiscal 2020.  

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 NDA 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 six months ended March 31, 2020, the Company accrued a $0.9 million milestone payment related to the progression of the ARO-ENaC program.  During the three and six months ended March 31, 2019, the Company did 0t accrue for any milestone payments.  In certain agreements, the Company may be required to make mid to high single-digit percentage royalty payments based on a percentage of the sales of the relevant products.     

 

NOTE 8. LEASES

Leases

 

In April 2019, the Company entered a new 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, and this lease has replaced the Company’s previous corporate headquarters office lease.  The increased capacity of this new office space compared to the Company’s current 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 $8.8 million over the term.  The Company expects to pay 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 March 31, 2020. 

The Company also leases approximately 74,000 square feet of office and laboratory space for its research facility in Madison, Wisconsin.  The lease will expire in September 2029. Lease payments are estimated to total approximately $13.3 million for the term. 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 March 31, 2020.   

Operating lease cost during the three and six months ended March 31, 2020 was $0.5 million and $0.9 million, respectively.  Variable lease costs during the three and six months ended March 31, 2020 were $0.2 million and $0.3 million, respectively.  There was 0 short-term lease cost during the three and six months ended March 31, 2020.

11


The following table presents maturities of operating lease liabilities on an undiscounted basis as of March 31, 2020:

 

2020 (remainder of fiscal year)

 

$

936,566

 

2021

 

 

2,256,379

 

2022

 

 

2,521,446

 

2023

 

 

2,590,558

 

2024

 

 

2,661,512

 

2025 and thereafter

 

 

10,834,206

 

Total lease payments

 

 

21,800,667

 

Less imputed interest

 

 

(6,933,478)

 

Total operating lease liabilities (includes current portion)

 

$

14,867,189

 

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 Statement of Cash Flow for the three and six months ended March 31, 2020 was $0.3 million and $0.6 million, respectively. The weighted-average remaining lease term and weighted-average discount rate for all leases as of March 31, 2020 was 8.6 years and 8.9%, respectively.

As of September 30, 2019, future minimum lease payments due in fiscal years under operating leases were as follows:

 

2020

 

$

1,521,451

 

2021

 

 

2,256,379

 

2022

 

 

2,521,446

 

2023

 

 

2,590,558

 

2024

 

 

2,661,512

 

2025 and thereafter

 

 

10,834,206

 

Total

 

$

22,385,552

 

 

During the three months ended March 31, 2020, the Company entered into a sublease agreement (the “Sublease”) with Halozyme, Inc. 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 space consists of approximately 21,000 rentable square feet located at 11404 Sorento Valley Road, San Diego, California, 92121.  The term of the Sublease commenced on April 1, 2020 and will expire on January 14, 2023.  Lease payments are estimated to total approximately $2.1 million over the term.

 

 

NOTE 9. STOCK-BASED COMPENSATION

Arrowhead has two plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and 2013 Incentive Plan, as of March 31, 2020, 886,598 and 5,972,038 shares, respectively, of Arrowhead’s Common Stock are reserved for the grant of stock options, stock appreciation rights, restricted stock awards and performance unit/share awards to employees, consultants and others. No further grants may be made under the 2004 Equity Incentive Plan.  As of March 31, 2020, there were options granted and outstanding to purchase 886,598 and 2,798,538 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 2,783,000 restricted stock units granted and outstanding under the 2013 Incentive Plan. Also, as of March 31, 2020, there were 1,024,850 shares reserved for options and 591,075 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans. During the three months ended March 31, 2020, 306,500 options and 1,744,071 restricted stock units were granted under the 2013 Incentive Plan, and 126,000 options and 300,000 restricted stock units were granted as inducement awards to new employees outside of equity incentive plans.   During the six months ended March 31, 2020, 310,500 options and 1,749,071 restricted stock units were granted under the 2013 Incentive Plan, and 343,000 options and 584,575 restricted stock units were granted as inducement awards to new employees outside of the equity incentive plans.

12


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

 

Balance At September 30, 2019

 

 

4,773,670

 

 

$

8.16

 

 

 

 

 

 

 

Granted

 

 

653,500

 

 

53.78

 

 

 

 

 

 

 

Cancelled

 

 

(30,752

)

 

15.00

 

 

 

 

 

 

 

Exercised

 

 

(686,432

)

 

6.31

 

 

 

 

 

 

 

Balance At March 31, 2020

 

 

4,709,986

 

 

$

14.72

 

 

6.2 years

 

$

82,658,407

 

Exercisable At March 31, 2020

 

 

3,111,009

 

 

$

7.12

 

 

4.8 years

 

$

67,796,517

 

 

Stock-based compensation expense related to stock options for the three months ended March 31, 2020 and 2019 was $2,527,839 and $1,017,065, respectively. Stock-based compensation expense related to stock options for the six months ended March 31, 2020 and 2019 was $4,136,910 and $1,807,500, 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 March 31, 2020 and 2019 was $17,968,884 and $7,580,360, respectively. The grant date fair value of the options granted by the Company for the six months ended March 31, 2020 and 2019 was $26,599,374 and $8,137,249, respectively.

The intrinsic value of the options exercised during the three months ended March 31, 2020 and 2019 was $8,605,235 and $6,806,594, respectively. The intrinsic value of the options exercised during the six months ended March 31, 2020 and 2019 was $30,245,825 and $8,122,294, respectively.

As of March 31, 2020, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $34,707,355 will be recognized in the Company’s results of operations over a weighted average period of 3.5 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:

 

 

 

Six Months Ended March 31,

 

 

2020

 

 

2019

Dividend yield

 

 

 

Risk-free interest rate

 

0.5 – 1.8%

 

 

2.3 – 3.1%

Volatility

 

90.5 – 91.8%

 

 

115%

Expected life (in years)

 

6.25

 

 

6.25

Weighted average grant date fair value per share of options granted

 

$40.70

 

 

$11.42

 

The dividend yield is 0 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.

13


Restricted Stock Units

Restricted stock units (RSUs), including time-based and performance-based awards, were granted under the Company’s 2013 Incentive Plan and as inducements grants granted outside of the Plan. During the three months ended March 31, 2020, the Company issued 1,744,071 RSUs under the 2013 Incentive Plan and 300,000 RSUs as inducement awards. During the six months ended March 31, 2020, the Company issued 1,749,071 RSUs under the 2013 Incentive Plan and 584,575 RSUs as inducement awards. At vesting, each outstanding RSU will be exchanged for one share of the Company’s Common Stock. RSU recipients may elect to net share settle upon vesting, in which case the Company pays the employee’s income taxes due upon vesting and withholds a number of shares of Common Stock of equal value.  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

 

Unvested at September 30, 2019

 

 

2,062,833

 

 

$

9.43

 

Granted

 

 

2,333,646

 

 

 

58.27

 

Vested

 

 

(955,404

)

 

 

9.07

 

Forfeited

 

 

(67,000

)

 

 

31.78

 

Unvested at March 31, 2020

 

 

3,374,075

 

 

$

42.87

 

 

During the three months ended March 31, 2020 and 2019, the Company recorded $10,443,863 and $1,584,283 of expense related to RSUs, respectively. During the six months ended March 31, 2020 and 2019, the Company recorded $13,326,545 and $3,511,381 of expense related to RSUs, respectively. Such expense is included in stock-based compensation expense in the Company’s Consolidated Statement 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.

As of March 31, 2020 the pre-tax compensation expense for all unvested RSUs in the amount of $89,156,048 will be recognized in the Company’s results of operations over a weighted average period of 3.5 years.

      

 

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 March 31, 2020 and September 30, 2019 for assets and liabilities measured at fair value on a recurring basis:

March 31, 2020:

14


 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents

 

$

256,650,727

 

 

$

 

 

$

 

 

$

256,650,727

 

Short-term investments

 

$

51,185,466

 

 

$

 

 

$

 

 

$

51,185,466

 

Long-term investments

 

$

190,872,772

 

 

$

 

 

$

 

 

$

190,872,772

 

Contingent consideration

 

$

 

 

$

 

 

$

 

 

$

 

 

September 30, 2019:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents

 

$

221,804,128

 

 

$

 

 

$

 

 

$

221,804,128

 

Short-term investments

 

$

37,122,478

 

 

$

 

 

$

 

 

$

37,122,478

 

Long-term investments

 

$

45,051,251

 

 

$

 

 

$

 

 

$

45,051,251

 

Contingent consideration

 

$

 

 

$

 

 

$

 

 

$

 

The Company had a liability for contingent consideration related to its acquisition of the Roche RNAi business completed in 2011. The fair value measurement of the contingent consideration obligations is determined using Level 3 inputs. The fair value of contingent consideration obligations is based on a discounted cash flow model using a probability-weighted income approach. The measurement is based upon unobservable inputs supported by little or no market activity based on the Company’s assumptions and experience. Estimating timing to complete the development and obtain approval of products is difficult, and there are inherent uncertainties in developing a product candidate, such as obtaining FDA and other regulatory approvals. In determining the probability of regulatory approval and commercial success, the Company utilizes data regarding similar milestone events from several sources, including industry studies and its own experience. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. In November 2016, the Company announced the discontinuation of its clinical trial efforts for ARC-520, ARC-AAT and ARC-521.  Given this development, the Company assessed the fair value of its contingent consideration obligation to be $0 at March 31, 2020 and September 30, 2019.  

 

 

 

 

 

15


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,” “could,” “estimate,” or “continue” or the negative 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 businesses, 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. As such, our actual results may differ significantly 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 described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including subsequent quarterly reports on Form 10-Q. 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.

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, or 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-AAT for liver disease associated with alpha-1 antitrypsin deficiency (AATD), ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, and ARO-LUNG2 as a candidate to treat chronic obstructive pulmonary disease (COPD). ARO-JNJ1 is being developed for an undisclosed liver-expressed target under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).  ARO-HBV (JNJ-3989) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.  ARO-LPA (AMG 890) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016.

Arrowhead operates a lab facility in Madison, Wisconsin, where the Company’s research and development activities, including the development of RNAi therapeutics, are based. The Company’s principal executive offices are located in Pasadena, California. During the three months ended March 31, 2020, the Company entered into a sublease for additional research and development facility space in San Diego, California.

Arrowhead has focused its resources on therapeutics that exclusively utilize the company’s Targeted RNAi Molecule (TRiMTM) platform technology. Therapeutics built on the TRiMTM platform have demonstrated high levels of pharmacologic activity in multiple animal models spanning several therapeutic areas. TRiMTM enabled therapeutics offer several potential advantages over prior generation and competing technologies, including: simplified manufacturing and reduced costs; multiple routes of administration including subcutaneous injection and inhaled administration; the ability to target multiple tissue types including liver, lung, and tumors; and the potential for improved safety and reduced risk of intracellular buildup, because there are less metabolites from smaller, simpler molecules.  

During the first half of fiscal 2020, the Company has continued to develop its pipeline and partnered candidates.  The Company has began dosing in an adaptive design phase 2/3 trial, called SEQUOIA, with the potential to serve as a pivotal registration study of ARO-AAT.  The Company also began dosing in its ARO-AAT 2002 study, a pilot open-label, multi-dose Phase 2 study to assess changes in novel histological activity scale in response to ARO-AAT over time in patients with alpha-1 antitrypsin deficiency associated liver disease.  The Company also presented new clinical data on its two cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, in two late-breaking oral presentations at the American Heart Association Scientific Sessions 2019.  The Company also filed an IND to begin a phase 1b study of ARO-HIF2, filed a CTA to begin a phase 1 study of ARO-HSD, and filed a CTA to begin phase 1 study of ARO-ENaC.  

16


The Company’s partnered candidates under its collaboration agreements with Janssen and Amgen also continue to progress.  Janssen began dosing patients in a phase 2b triple combination study called REEF-1, designed to enroll up to 450 patients with chronic hepatitis B infection, and in connection with the start of this study Arrowhead earned a $25 million milestone payment under the License Agreement (“Janssen License Agreement”). Janssen has also nominated the first of 3 potential candidates under the Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”), ARO-JNJ1, and the Company is currently performing discovery, optimization and preclinical research and development for this candidate.  Under the terms of the Janssen agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”) in Arrowhead common stock under the Stock Purchase Agreement (“JJDC Stock Purchase Agreement”), two $25 million milestone payments and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the three additional targets covered under the Janssen Collaboration Agreement.  The Company is further eligible to receive tiered royalties up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  The Company’s collaboration agreement with Amgen for AMG 890 (ARO-LPA), (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), continues to progress.  The Company has received $35 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, a $10 million milestone payment, and may receive up to $420 million in development, regulatory and sales milestone payments.  The Company is eligible to receive up to low double-digit royalties for sales of products under the AMG 890 (ARO-LPA) Agreement.  

The Company continues to develop other clinical candidates for future clinical trials. Clinical candidates are tested internally and through GLP toxicology studies at outside laboratories.  Drug materials for such studies and clinical trials are either contracted to third-party manufactures or manufactured internally.  The Company engages third-party contract research organizations (CROs) to manage clinical trials and works cooperatively with such organizations on all aspects of clinical trial management, including plan design, patient recruiting, and follow up.  These outside costs, relating to the preparation for and administration of clinical trials, are referred to as “program costs”.  If the clinical candidates progress through human testing, program costs will increase. 

The Company is actively monitoring the novel coronavirus (“COVID-19”) situation.  The financial results for the three and six months ended March 31, 2020 were not significantly impacted by COVID-19.  The Company has paused enrollment in its two ARO-AAT studies: SEQUOIA and the ARO-AAT 2002 study, but now is working with sites and investigators to begin the process of resuming screening and enrollment.  Patients already enrolled in these studies continue to be dosed per protocol and continue to come in for their follow up visits. Additional delays have occurred in the Company’s earlier stage programs, but we do not expect a material impact to any program’s anticipated timelines. Several of the Company’s other clinical candidates are in the start-up stage (ARO-HSD, ARO-HIF2 and ARO-ENaC), during which significant clinical costs will continue to be incurred. Additionally, the Company’s operations at its research and development facility in Madison, WI and its corporate headquarters in Pasadena, CA have continued to operate with limited impact, other than for enhanced safety measures including work from home policies. However, the Company cannot predict the impact of the progression of COVID-19 will have on future financial 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 ultimately the length of the COVID-19 pandemic.  

Net losses were $19.8 million for the three months ended March 31, 2020 as compared to net income of $23.9 million for the three months ended March 31, 2019. Net losses were $22.5 million for the six months ended March 31, 2020 as compared to net income of $35.9 million for the six months ended March 31, 2019. Net losses per share – diluted were $0.20 for the three months ended March 31, 2020 as compared to net income per share - diluted of $0.24 for the three months ended March 31, 2019. Net losses per share – diluted were $0.23 for the six months ended March 31, 2020 as compared to net income per share – diluted of $0.37 for the six months ended March 31, 2019. An increase in research and development and general and administrative expenses coupled with a decrease in revenue from the license and collaboration agreements with Janssen were the drivers of the increase in net losses and net losses per share, as discussed further below.

The Company strengthened its liquidity and financial position through the Janssen License Agreement, Janssen Collaboration Agreement and JJDC Stock Purchase Agreement, executed in October 2018.  Under the terms of the agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock, and two $25 million milestone payments.  Additionally, in December 2019, the Company completed a securities offering which generated approximately $250.5 million in net cash proceeds.  These cash proceeds secure the funding needed to continue to advance our pipeline candidates. The Company had $256.7 million of cash and cash equivalents, $51.0 million in short-term investments, $190.6 million of long term investments and $561.1 million of total assets as of March 31, 2020, as compared to $221.8 million, $36.9 million, $44.2 million and $349.8 million as of September 30, 2019, respectively. Based upon the Company’s current cash and investment resources and operating plan, the Company expects to have sufficient liquidity to fund operations for at least the next twelve months.

17


Critical Accounting Policies and Estimates

Management makes certain judgments and uses certain estimates and assumptions when applying GAAP in the preparation of our Consolidated Financial Statements. We evaluate our estimates and judgments on an ongoing basis and base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements. For further information, see Note 1, Organization and Significant Accounting Policies, to our Consolidated Financial Statements, which outlines our application 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, except as a result of the Financial Accounting Standards Board (FASB)’s Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), as discussed below:

Leases - The Company determines whether a contract is, or contains, a lease at inception. The Company classifies each of its  leases as operating or financing considering factors such as the length of the lease term, the present value of the lease payments, the nature of the asset being leased, and the potential for ownership of the asset to transfer during the lease term. Leases with terms greater than one-year are recognized on the Consolidated Balance Sheets as Right-of-use assets and Lease liabilities and are measured at the present value of the fixed payments due over the expected lease term minus the present value of any incentives, rebates or abatements expected to be received from the lessor. Options to extend a lease are typically excluded from the expected lease term as the exercise of the option is typically not reasonably certain.  The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis an amount equal to the lease payments over a similar term and in a similar economic environment. The Company records expense to recognize fixed lease payments on a straight-line basis over the expected lease term. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are expensed as incurred.

Results of Operations

The following data summarizes our results of operations for the following periods indicated:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

March 31, 2020

 

March 31, 2019

Revenue

 

$

23,528,853

 

 

$

48,148,275

 

 

Operating Income (Loss)

 

 

(22,240,255)

 

 

 

22,010,692

 

 

Net Income (Loss)

 

 

(19,835,570)

 

 

 

23,896,982

 

 

Net Income (Loss) per Share (Diluted)

 

$

(0.20)

 

 

$

0.24

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

March 31, 2020

 

March 31, 2019

Revenue

 

$

52,983,433

 

 

$

82,806,171

 

 

Operating Income (Loss)

 

 

(27,093,848)

 

 

 

32,956,836

 

 

Net Income (Loss)

 

 

(22,509,298)

 

 

 

35,934,235

 

 

Net Income (Loss) per Share (Diluted)

 

$

(0.23)

 

 

$

0.37

 

 

 

 

The decrease in our Revenue during the three and six months ended March 31, 2020 was driven by the timing of progress achieved in completing our performance obligation from our agreements with Janssen and JJDC, which were executed in October 2018.  The increase in our Net Loss during the three and six months ended March 31, 2020 was driven by this decrease in Revenue and also increases in Research and Development and General and Administrative Expenses as our pipeline of clinical candidates has continued to increase.  

Revenue

Total revenue was $23,528,853 for the three months ended March 31, 2020 and $48,148,275 for the three months ended March 31, 2019. Total revenue was $52,983,433 for the six months ended March 31, 2020 and $82,806,171 for the six months ended March 31, 2019.  Revenue in the both periods is primarily related to the recognition of a portion of the $252.5 million initial transaction price associated with our agreements with Janssen and JJDC as we achieved progress toward completing our performance obligation within those agreements.  

18


Amgen Inc.

On September 28, 2016, the Company entered into two Collaboration and License agreements, and a Common Stock Purchase Agreement with Amgen Inc., a Delaware corporation (“Amgen”). Under one of the license agreements (the “Second Collaboration and License Agreement” or “AMG 890 (ARO-LPA) Agreement”), Amgen has received a worldwide, exclusive license to Arrowhead’s novel, RNAi 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 other license agreement (the “First Collaboration and License Agreement” or “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. In both agreements, Amgen is wholly responsible for clinical development and commercialization. Under the terms of the agreements taken together, the Company has received $35 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and a $10 million milestone payment, and may receive up to $420 million in 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 AMG 890 (ARO-LPA) 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 substantially completed its performance obligations under the AMG 890 (ARO-LPA) Agreement and the ARO-AMG1 Agreement.  Future milestones and royalties achieved will be recognized in their entirety when earned.  During the three and six months ended March 31, 2020, the Company recognized $0 of Revenue associated with its agreements with Amgen. During the three and six months ended March 31, 2019, the Company recognized $0.3 million of Revenue associated with its agreements with Amgen. As of March 31, 2020, there was $0 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 (“Janssen License Agreement”) and a Research Collaboration and Option Agreement (“Janssen Collaboration Agreement”) with Janssen Pharmaceuticals, Inc.  (“Janssen”) part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a Stock Purchase Agreement (“JJDC Stock Purchase Agreement”) with Johnson & Johnson Innovation-JJDC, Inc.  (“JJDC”), a New Jersey corporation.  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 potentially curative therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV), Janssen will be wholly responsible for clinical development and commercialization.  Under the Janssen Collaboration Agreement, Janssen will be able to select three new targets against which Arrowhead will develop clinical candidates.  These candidates are subject to certain restrictions and will not include candidates in the Company’s current pipeline.  The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, sufficient to allow the filing of a U.S. Investigational New Drug application or equivalent, at which time Janssen will have the option to take an exclusive license. If the option is exercised, Janssen will be wholly responsible for clinical development and commercialization of each optioned candidate.  Under the terms of the agreements taken together, the Company has received $175 million as an upfront payment, $75 million in the form of an equity investment by JJDC in Arrowhead common stock, two $25 million milestone payments and may receive up to $1.6 billion in development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in development and sales milestone payments for the three additional targets covered under the Janssen Collaboration Agreement.  The Company is further eligible to receive tiered royalties up to mid teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement on product sales.  

The Company has evaluated these agreements in accordance with the new revenue recognition requirements that became effective for the Company on October 1, 2018.  The adoption of the new revenue standard did not have a material impact on the balances reported when evaluated under the superseded revenue standard.  At the inception of these agreements, the Company has identified one 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 ongoing Phase 1 / 2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of 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 will be accounted for if and when it is exercised.

The Company determined the transaction price totaled approximately $252.5 million which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, the two $25 million milestone payments earned and estimated payments for reimbursable Janssen R&D services to be performed.  The Company has allocated the total $252.5 million initial

19


transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.  This revenue will be recognized using a proportional performance method (based on actual labor hours versus estimated total labor hours) beginning in October 2018 and ending as the Company’s efforts in overseeing the ongoing phase 1 / 2 clinical trial are completed.  During the three months ended March 31, 2020 and 2019, the Company recognized approximately $22.2 million and $47.9 million of Revenue associated with its agreements with Janssen and JJDC, respectively. During the six months ended March 31, 2020 and 2019, the Company recognized approximately $50.9 million and $82.5 million of Revenue associated with its agreements with Janssen and JJDC, respectively. As of March 31, 2020, there were $0 in contract assets recorded as accounts receivable, and $33.2 million of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.  The $33.2 million of current deferred revenue is driven by the upfront payment, the premium paid by JJDC for its equity investment in the Company, and the two $25 million milestone payments earned, net of revenue recognized to date.

Janssen has also selected the first of the three targets under the Janssen Collaboration Agreement, now referred to as ARO-JNJ1, and the Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1.  All costs and labor hours spent by the Company will be entirely funded by Janssen.  During the three months ended March 31, 2020 and 2019, the Company recognized $1.4 million and $0 of Revenue associated with its efforts on the ARO-JNJ1 candidate, respectively. During the six months ended March 31, 2020 and 2019, the Company recognized $2.1 million and $0 of Revenue associated with these efforts on the ARO-JNJ1 candidate, respectively. As of March 31, 2020, there were $1.3 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.                                         

Operating Expenses

The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. Certain reclassifications have been made to prior-period operating expense categories to conform to the current period presentation.  For purposes of comparison, the amounts for the three and six months ended March 31, 2020 and 2019 are shown in the tables below.

Research and Development Expenses

R&D expenses are related to the Company’s research and development efforts, and related program costs which are comprised primarily of outsourced costs related to the manufacturing of clinical supplies, toxicity/efficacy studies and clinical trial expenses.  Internal costs primarily relate to operations at our research facility in Madison, Wisconsin, including facility costs and laboratory-related expenses. Salaries and stock compensation expense consist of salary, bonuses, payroll taxes and related benefits and stock compensation for our R&D personnel.  Depreciation and amortization expense relates to depreciation on lab equipment and leasehold improvements at our Madison research facility.  The following table provides details of research and development expenses for the periods indicated:

(in thousands)

 

 

 

Three

 

 

 

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

% of Expense

 

 

Months Ended

 

 

% of Expense

 

 

Increase (Decrease)

 

 

 

March 31, 2020

 

 

Category

 

 

March 31, 2019

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

4,216

 

 

 

14

%

 

$

3,387

 

 

 

16

%

 

$

829

 

 

 

24

%

Stock compensation

 

 

2,953

 

 

 

10

%

 

 

881

 

 

 

4

%

 

 

2,072

 

 

 

235

%

In Vivo studies

 

 

776

 

 

 

3

%

 

 

413

 

 

 

2

%

 

 

363

 

 

 

88

%

Drug manufacturing

 

 

7,377

 

 

 

25

%

 

 

7,430

 

 

 

36

%

 

 

(53

)

 

 

-1

%

Toxicity/efficacy studies

 

 

2,171

 

 

 

7

%

 

 

2,410

 

 

 

12

%

 

 

(239

)

 

 

-10

%

Clinical trials

 

 

5,268

 

 

 

18

%

 

 

3,205

 

 

 

15

%

 

 

2,063

 

 

 

64

%

License, royalty & milestones

 

 

900

 

 

 

3

%

 

 

-

 

 

 

0

%

 

 

900

 

 

N/A

 

Facilities related

 

 

823

 

 

 

3

%

 

 

783

 

 

 

4

%

 

 

40

 

 

 

5

%

Depreciation/amortization

 

 

1,219

 

 

 

4

%

 

 

1,170

 

 

 

6

%

 

 

49

 

 

 

4

%

Other R&D

 

 

3,740

 

 

 

13

%

 

 

1,120

 

 

 

5

%

 

 

2,620

 

 

 

234

%

Total

 

$

29,443

 

 

 

100

%

 

$

20,799

 

 

 

100

%

 

$

8,644

 

 

 

42

%

 

 

20


 

 

Six

 

 

 

 

 

 

Six

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

% of Expense

 

 

Months Ended

 

 

% of Expense

 

 

Increase (Decrease)

 

 

 

March 31, 2020

 

 

Category

 

 

March 31, 2019

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

8,312

 

 

 

16

%

 

$

6,664

 

 

 

17

%

 

$

1,648

 

 

 

25

%

Stock compensation

 

 

4,115

 

 

 

8

%

 

 

1,522

 

 

 

4

%

 

 

2,593

 

 

 

170

%

In Vivo studies

 

 

1,747

 

 

 

3

%

 

 

896

 

 

 

2

%

 

 

851

 

 

 

95

%

Drug manufacturing

 

 

12,485

 

 

 

24

%

 

 

13,234

 

 

 

35

%

 

 

(749

)

 

 

-6

%

Toxicity/efficacy studies

 

 

6,123

 

 

 

12

%

 

 

4,821

 

 

 

13

%

 

 

1,302

 

 

 

27

%

Clinical trials

 

 

9,635

 

 

 

18

%

 

 

5,447

 

 

 

14

%

 

 

4,188

 

 

 

77

%

License, royalty & milestones

 

 

903

 

 

 

2

%

 

 

-

 

 

 

0

%

 

 

903

 

 

N/A

 

Facilities related

 

 

1,444

 

 

 

3

%

 

 

1,366

 

 

 

4

%

 

 

78

 

 

 

6

%

Depreciation/amortization

 

 

2,330

 

 

 

4

%

 

 

2,342

 

 

 

6

%

 

 

(12

)

 

 

-1

%

Other R&D

 

 

5,723

 

 

 

11

%

 

 

2,079

 

 

 

5

%

 

 

3,644

 

 

 

175

%

Total

 

$

52,817

 

 

 

100

%

 

$

38,371

 

 

 

100

%

 

$

14,446

 

 

 

38

%

 

 

Salaries expense increased by $829,000 from $3,387,000 during the three months ended March 31, 2019 to $4,216,000 during the current period. Salaries expense increased by $1,648,000 from $6,664,000 during the six months ended March 31, 2019 to $8,312,000 during the current period.   The increase in the expense is primarily due to an increase in R&D headcount that has occurred as the Company has expanded its pipeline of candidates.

Stock compensation expense, a non-cash expense, increased by $2,072,000 from $881,000 during the three months ended March 31, 2019 to $2,953,000 during the current period.  Stock compensation expense, a non-cash expense, increased by $2,593,000 from $1,522,000 during the six months ended March 31, 2019 to $4,115,000 during the current period.  Stock compensation expense is based upon the valuation of stock options and restricted stock units granted to employees, directors, and certain consultants. Many variables affect the amount expensed, including the Company’s stock price on the date of the grant, as well as other assumptions. The increase in the expense is primarily due to the increased headcount discussed above and a mix of higher grant date fair values of awards amortizing during the periods due to the Company’s stock price at the time of the grants.

In vivo studies expense increased by $363,000 from $413,000 during the three months ended March 31, 2019 to $776,000 during the current period. In vivo studies expense increased by $851,000 from $896,000 during the six months ended March 31, 2019 to $1,747,000 during the current period. In vivo studies expense can vary depending on the stage of preclinical candidates, the nature and amount of testing required and the cost variation of different in vivo testing models.  The increase in vivo studies expense is the result of the timing of discovery studies being completed between periods.  

Drug manufacturing expense decreased by $53,000 from $7,430,000 during the three months ended March 31, 2019 to $7,377,000 during the current period. Drug manufacturing expense decreased by $749,000 from $13,234,000 during the six months ended March 31, 2019 to $12,485,000 during the current period.   The decrease in the expense primarily relates to the timing of manufacturing campaigns in preparation for our candidate clinical trials and toxicology studies.  We anticipate this expense to increase as the volume of candidates in our pipeline increases and as each candidate progresses through clinical trial phases.

21


Toxicity/efficacy studies expense decreased by $239,000 from $2,410,000 during the three months ended March 31, 2019 to $2,171,000 during the current period. Toxicity/efficacy studies expense increased by $1,302,000 from $4,821,000 during the six months ended March 31, 2019 to $6,123,000 during the current period. This category includes IND-enabling toxicology studies as well as post-IND toxicology studies, such as long-term toxicology studies, and other efficacy studies.  The change in the expense primarily relates to toxicology studies for ARO-ANG3, ARO-APOC3, ARO-HIF2 and ARO-HSD as each candidate progresses through and into clinical trials.  We anticipate this expense to increase as we prepare to enter clinical trials with our other drug candidates.

Clinical trials expense increased by $2,063,000 from $3,205,000 during the three months ended March 31, 2019 to $5,268,000 during the current period. Clinical trials expense increased by $4,188,000 from $5,447,000 during the six months ended March 31, 2019 to $9,635,000 during the current period. The increase in the expense is primarily due to the ongoing ARO-AAT and JNJ-3989 (ARO-HBV) clinical trials, and the progression of the ARO-ANG3 and ARO-APOC3 clinical trials, and the start up of the ARO-HSD and ARO-HIF2 clinical trials. We anticipate this expense to increase as our current clinical candidates progress through clinical trials and as we enter clinical trials with our other drug candidates.

License, royalty and milestones expense increased by $900,000 from $0 during the three months ended March 31, 2019 to $900,000 during the current period. License, royalty and milestones expense increased by $903,000 from $0 during the six months ended March 31, 2019 to $903,000 during the current period. This category includes milestone payments which can vary from period to period depending on the nature of our various license agreements, and the timing of reaching various development milestones requiring payment. During the three and six months ended March 31, 2020, the Company accrued a $0.9 million milestone payment related to the progression of the ARO-ENaC program.  During the three and six months ended March 31, 2019, the Company did not accrue for any milestone payments.  

Facilities expense increased by $40,000 from $783,000 during the three months ended March 31, 2019 to $823,000 during the current period. Facilities expense increased by $78,000 from $1,366,000 during the six months ended March 31, 2019 to $1,444,000 during the current period This category includes rental costs for our research and development facility in Madison, Wisconsin.  The increase in the expense is primarily due to increased rental and common area maintenance expenses for our research and development facility.

Depreciation and amortization expense, a non-cash expense, increased by $49,000 from $1,170,000 during the three months ended March 31, 2019 to $1,219,000 during the current period. Depreciation and amortization expense, a non-cash expense, decreased by $12,000 from $2,342,000 during the six months ended March 31, 2019 to $2,330,000 during the current period. The majority of depreciation and amortization expense relates to depreciation on lab equipment at our Madison research facility.  In addition, the Company records depreciation on leasehold improvements at its Madison research facility. Depreciation and amortization expense was relatively consistent in both the three month and six month periods.

Other research expense increased by $2,620,000 from $1,120,000 during the three months ended March 31, 2019 to $3,740,000 during the current period. Other research expense increased by $3,644,000 from $2,079,000 during the six months ended March 31, 2019 to $5,723,000 during the current period.  This category includes the following costs to support discovery efforts and the advancement of current drug candidates: in-house laboratory supplies, outsourced labs services, and other miscellaneous research and development expenses. The increase in other research expense is due to additional in-house laboratory supplies for our increased headcount and partially due to equipment purchased for the new San Diego research and development facility.   

22


General & Administrative Expenses

The following table provides details of our general and administrative expenses for the periods indicated:

(in thousands)

 

 

 

Three

 

 

 

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

% of Expense

 

 

Months Ended

 

 

% of Expense

 

 

Increase (Decrease)

 

 

 

March 31, 2020

 

 

Category

 

 

March 31, 2019

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

3,033

 

 

 

19

%

 

$

1,579

 

 

 

30

%

 

$

1,454

 

 

 

92

%

Stock compensation

 

 

10,019

 

 

 

61

%

 

 

1,720

 

 

 

32

%

 

 

8,299

 

 

 

483

%

Professional/outside services

 

 

1,677

 

 

 

10

%

 

 

1,362

 

 

 

26

%

 

 

315

 

 

 

23

%

Facilities related

 

 

418

 

 

 

3

%

 

 

265

 

 

 

5

%

 

 

153

 

 

 

58

%

Depreciation/amortization

 

 

153

 

 

 

1

%

 

 

6

 

 

 

0

%

 

 

147

 

 

 

2450

%

Other G&A

 

 

1,026

 

 

 

6

%

 

 

407

 

 

 

8

%

 

 

619

 

 

 

152

%

Total

 

$

16,326

 

 

 

100

%

 

$

5,339

 

 

 

100

%

 

$

10,987

 

 

 

206

%

 

 

 

Six

 

 

 

 

 

 

Six

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months Ended

 

 

% of Expense

 

 

Months Ended

 

 

% of Expense

 

 

Increase (Decrease)

 

 

 

March 31, 2020

 

 

Category

 

 

March 31, 2019

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

7,114

 

 

 

26

%

 

$

3,667

 

 

 

32

%

 

$

3,447

 

 

 

94

%

Stock compensation

 

 

13,349

 

 

 

49

%

 

 

3,797

 

 

 

33

%

 

 

9,552

 

 

 

252

%

Professional/outside services

 

 

3,499

 

 

 

13

%

 

 

2,581

 

 

 

23

%

 

 

918

 

 

 

36

%

Facilities related

 

 

1,211

 

 

 

4

%

 

 

563

 

 

 

5

%

 

 

648

 

 

 

115

%

Depreciation/amortization

 

 

302

 

 

 

1

%

 

 

11

 

 

 

0

%

 

 

291

 

 

 

2645

%

Other G&A

 

 

1,785

 

 

 

7

%

 

 

860

 

 

 

8

%

 

 

925

 

 

 

108

%

Total

 

$

27,260

 

 

 

100

%

 

$

11,479

 

 

 

100

%

 

$

15,781

 

 

 

137

%

 

Salaries expense increased by $1,454,000 from $1,579,000 during the three months ended March 31, 2019 to $3,033,000 during the current period. Salaries expense increased by $3,447,000 from $3,667,000 during the six months ended March 31, 2019 to $7,114,000 during the current period.   The increase in the expense is primarily driven by annual merit increases, performance bonuses and increased headcount.  

Stock compensation expense, a non-cash expense, increased by $8,299,000 from $1,720,000 during the three months ended March 31, 2019 to $10,019,000 during the current period.  Stock compensation expense, a non-cash expense, increased by $9,552,000 from $3,797,000 during the six months ended March 31, 2019 to $13,349,000 during the current period. Stock compensation expense is based upon the valuation of stock options and restricted stock units granted to employees, directors, and certain consultants. Many variables affect the amount expensed, including the Company’s stock price on the date of the grant, as well as other assumptions. The increase in expense is primarily due to the timing of the achievement of certain performance-based awards in each period.

23


Professional/outside services include legal, accounting, consulting, patent expenses, business insurance expenses and other outside services retained by the Company. Professional/outside services expense increased by $315,000 from $1,362,000 during the three months ended March 31, 2019 to $1,677,000 during the current period. Professional/outside services expense increased by $918,000 from $2,581,000 during the six months ended March 31, 2019 to $3,499,000 during the current period. The increases in the expense in the three and six month periods are primarily related to recruiting fees for increased headcount.

Facilities-related expense increased by $153,000 from $265,000 during the three months ended March 31, 2019 to $418,000 during the current period. Facilities-related expense increased by $648,000 from $563,000 during the six months ended March 31, 2019 to $1,211,000 during the current period. This category primarily includes rental costs for our corporate headquarters in Pasadena, California.  The increase in the expense is primarily related to costs incurred as we moved into our new corporate headquarters during the current period.    

Depreciation and amortization expense, a noncash expense, increased by $147,000 from $6,000 during the three months ended March 31, 2019 to $153,000 during the current period. Depreciation and amortization expense, a noncash expense, increased by $291,000 from $11,000 during the six months ended March 31, 2019 to $302,000 during the current period. The majority of general and administrative depreciation and amortization expense relates to depreciation on leasehold improvements at our Pasadena headquarters. The increase in the expense is primarily related to amortization of leasehold improvements for our new corporate headquarters.

Other G&A expense increased by $619,000 from $407,000 during the three months ended March 31, 2019 to $1,026,000 during the current period.  Other G&A expense increased by $925,000 from $860,000 during the six months ended March 31, 2019 to $1,785,000 during the current period.  This category consists primarily of travel, communication and technology, office expenses, and franchise and property tax expenses.  The increase in the expense was due to increased communication and technology and office expenses associated with our new corporate headquarters.  

Other Income / Expense

Other income / expense was income of $2,404,685 and $1,886,290 during the three months ended March 31, 2020 and 2019, respectively. Other income / expense was income of $4,584,550 and $2,977,399 during the six months ended March 31, 2020 and 2019, respectively.  Other income / expense in the both periods was interest income earned on the Company’s investments.  This interest income has increased in the current periods as our investment holdings have grown.    

Liquidity and Cash Resources

Arrowhead has historically financed its operations through the sale of its equity securities. 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.

At March 31, 2020, the Company had cash on hand of approximately $256.7 million as compared to $221.8 million at September 30, 2019.  Excess cash invested in short-term fixed income securities was $51.0 million at March 31, 2020, compared to $36.9 million at September 30, 2019.  Excess cash invested in long-term fixed income securities was $190.6 million at March 31, 2020, compared to $44.2 million at September 30, 2019.  The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months.

A summary of cash flows for the six months ended March 31, 2020 and 2019 is as follows:

 

 

 

 

 

 

Six Months Ended

March 31, 2020

 

 

Six Months Ended March 31, 2019

 

Cash Flow from Continuing Operations:

 

 

 

 

 

 

 

 

Operating Activities

 

$

(51,114,395

)

 

$

148,698,255

 

Investing Activities

 

 

(168,849,557)

 

 

 

(78,973,570

)

Financing Activities

 

 

254,810,551

 

 

 

61,781,310

 

Net Increase (Decrease) in Cash

 

 

34,846,599

 

 

 

131,505,995

 

Cash and Cash Equivalents at Beginning of Period

 

 

221,804,128

 

 

 

30,133,213

 

Cash and Cash Equivalents at End of Period

 

$

256,650,727

 

 

$

161,639,208

 

24


During the six months ended March 31, 2020, the Company used $51.1 million in cash from operating activities, which was primarily related to the ongoing expenses of the Company’s research and development programs and general and administrative expenses.  Cash used in investing activities was $168.8 million, which was primarily related to the purchase of fixed-income investments of $180.5 million and property and equipment of $7.9 million, partially offset by maturities of fixed-income securities of $19.6 million.  Cash provided by financing activities of $254.8 million was driven by the securities financing in December 2019, which generated $250.5 million in net cash proceeds, as well as $4.3 million in cash received from stock option exercises.

During the six months ended March 31, 2019, the Company generated $148.7 million in cash from operating activities, which was primarily related to the $175.0 million upfront payment received from Janssen and the premium JJDC paid on the Company’s common stock during the period.  These inflows were partially offset by approximately $41 million of cash used for the ongoing expenses of the Company’s research and development programs and general and administrative expenses.  Cash used in investing activities was $79.0 million, which was primarily related to purchases of fixed-income investments of $90.3 million.  Cash provided by financing activities of $61.8 million was driven by the equity investment the Company received from JJDC during the period. 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships.

 

25


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our exposure to market risk from that described in Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2019.

ITEM 4.

CONTROLS AND PROCEDURES

Our Chief Executive Officer and our Chief Financial Officer, after evaluating our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer where appropriate, to allow timely decisions regarding required disclosure.

No change in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

26


PART II—OTHER INFORMATION

ITEM 1.

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation, which arise in the normal course of our business. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings, particularly complex legal proceedings, cannot be predicted with any certainty. We disclosed information about certain of our legal proceedings in Part I, Item 3 of our Annual Report on Form 10-K for the year ended September 30, 2019.  

ITEM 1A.

Risk Factors

The disclosure below supplements the risk factors described in our Annual Report on Form 10-K for the year ended September 30, 2019. Please carefully consider the information set forth in this Quarterly Report on Form 10-Q and the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of shares of our Common Stock. Additional risks not currently known or currently material to us may also harm our business.

 

Our results of operations and financial condition may be adversely affected by the novel coronavirus (COVID-19) pandemic and other public health epidemics.

Our business and its operations, including but not limited to our research and development activities and our supply chain, could be adversely affected by health epidemics in regions where we have business operations, and such health epidemics could cause significant disruption in the operations of third parties upon whom we rely. In December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries, including the United States, and has been declared a pandemic by the World Health Organization. In response to public health directives and orders related to COVID-19, we have implemented work-from-home policies for substantially all of our employees to the extent work can be performed effectively at home. The effects of executive and similar government orders, shelter-in-place orders and our work-from-home policies may negatively impact our productivity, disrupt our business, increase our expenses, including costs associated with preventive and precautionary measures that we, companies with which we conduct business, and governments are taking, and delay our clinical trials and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, results of operations and financial condition.

Quarantines, shelter-in-place, executive and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases, have impacted and may continue to impact personnel at our business partners in the United States and other countries, or our access to raw materials for our research and development facility discovery efforts, which would disrupt our supply chain.

In addition, our clinical trials have been and may continue to be affected by the COVID-19 pandemic. For example, we have paused enrollment in our two ARO-AAT studies: SEQUOIA and the ARO-AAT 2002 study. If COVID-19 continues to spread in the United States and elsewhere, we may experience additional disruptions that could severely impact our business, preclinical studies and clinical trials, including:

 

delays in receiving authorization from local regulatory authorities to initiate any planned clinical trials;

 

delays or difficulties in enrolling patients in our clinical trials;

 

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;

 

changes in local regulations as part of a response to the COVID-19 pandemic which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;

 

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

 

interruption of key clinical trial activities, such as clinical trial site monitoring and data entry and verification, due to limitations on travel imposed or recommended by federal or state governments, employers and others, or interruption of

27


 

clinical trial subject visits and study procedures, the occurrence of which could affect the completeness and integrity of clinical trial data and, as a result, the determine the outcomes of the trial;

 

risk that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events;

 

risk that participants enrolled in our clinical trials will not be able to travel to our clinical trial sites as a result of quarantines or other restrictions resulting from COVID-19;

 

risk that participants enrolled in our clinical trials will not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services;

 

interruptions or delays in preclinical studies due to restricted or limited operations at our research and development laboratory facilities;

 

delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;

 

limitations in employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

 

refusal of the FDA to accept data from clinical trials in affected geographies; and

 

interruption or delays to our clinical activities.

The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by COVID-19, and the duration of such impact, may be difficult to assess or predict, the widespread pandemic has resulted in significant disruption of global financial markets, which could reduce our ability to access capital and negatively affect our future liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 and related government orders and restrictions could materially affect our business and the value of our common stock.

The COVID-19 pandemic continues to evolve rapidly. The ultimate impact of the COVID-19 pandemic or a similar public health emergency is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems, or the global economy as a whole. However, any one or a combination of these events could have an adverse effect on our results of operations and financial condition

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

 

 

 

28


ITEM 6.

EXHIBITS

 

Exhibit
Number

 

Document Description

 

 

 

10.1

 

 

31.1

 

Sublease agreement by and between Halozyme, Inc. and Arrowhead Pharmaceuticals Inc. dated March 3, 2020*†

 

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

 

 

 

32.2

 

 

 

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

 

 

 

 

101.SCH

 

101.CAL

 

101.LAB

 

101.PRE

 

101.DEF

 

104

 

XBRL Taxonomy Extension Schema Document*

 

XBRL Taxonomy Extension Calculation Linkbase Document*

 

XBRL Taxonomy Extension Label Linkbase Document*

 

XBRL Taxonomy Extension Presentation Linkbase Document*

 

XBRL Taxonomy Extension Definition Linkbase Document*

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL (included as Exhibit 101)*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Filed herewith

**

Furnished herewith

Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the       identified    confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.

 

 

 

 

 

29


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 7, 2020

 

ARROWHEAD PHARMACEUTICALS, INC.

 

 

 

By:

 

/s/ Kenneth A. Myszkowski

 

 

Kenneth A. Myszkowski

 

 

Chief Financial Officer

 

 

30