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ARWR Arrowhead Pharmaceuticals

Filed: 5 Aug 21, 4:14pm

 

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 June 30, 2021 

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)

 

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 (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.  

 

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 August 2, 2021 was 104,259,256.

 

 

 


 

 

 

Page(s)

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1. FINANCIAL STATEMENTS

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

Consolidated Statements of Stockholders’ Equity

3

 

 

Consolidated Statements of Cash Flows

4

 

 

Notes to Consolidated Financial Statements

5

 

 

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

17

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

 

 

ITEM 4. CONTROLS AND PROCEDURES

27

 

 

PART II — OTHER INFORMATION

28

 

 

ITEM 1. LEGAL PROCEEDINGS

28

 

 

ITEM 1A. RISK FACTORS

28

 

 

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

(In thousands, except per share amounts)

 

 

(unaudited)

June 30, 2021

 

 

September 30, 2020

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

325,981

 

 

$

143,583

 

Accounts receivable

 

671

 

 

 

845

 

Prepaid expenses

 

7,276

 

 

 

4,250

 

Other current assets

 

1,696

 

 

 

1,782

 

Marketable securities

 

126,407

 

 

 

85,020

 

Short term investments

 

63,924

 

 

 

86,890

 

TOTAL CURRENT ASSETS

 

525,955

 

 

 

322,370

 

Property and equipment, net

 

47,786

 

 

 

30,881

 

Intangible assets, net

 

14,088

 

 

 

15,363

 

Long term investments

 

128,376

 

 

 

137,487

 

Operating Lease - Right-of-use assets

 

18,450

 

 

 

16,138

 

Other assets

 

272

 

 

 

265

 

TOTAL ASSETS

$

734,927

 

 

$

522,504

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

$

10,037

 

 

$

6,829

 

Accrued expenses

 

29,525

 

 

 

5,405

 

Accrued payroll and benefits

 

3,648

 

 

 

8,061

 

Lease liabilities

 

1,290

 

 

 

1,095

 

Deferred revenue

 

150,934

 

 

 

19,291

 

TOTAL CURRENT LIABILITIES

 

195,434

 

 

 

40,681

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

22,854

 

 

 

20,044

 

Deferred revenue, net of current portion

 

79,749

 

 

 

-

 

TOTAL LONG-TERM LIABILITIES

 

102,603

 

 

 

20,044

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Arrowhead Pharmaceuticals, Inc. stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value; 145,000 shares authorized; 104,209 and 102,376 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively

 

197

 

 

 

195

 

Additional paid-in capital

 

1,017,949

 

 

 

965,410

 

Accumulated other comprehensive income

 

62

 

 

 

18

 

Accumulated deficit

 

(581,318

)

 

 

(503,844

)

TOTAL STOCKHOLDERS’ EQUITY

 

436,890

 

 

 

461,779

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

734,927

 

 

$

522,504

 

 

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)

(In thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

REVENUE

 

$

45,891

 

 

$

27,376

 

 

$

100,004

 

 

$

80,359

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

59,325

 

 

 

32,573

 

 

 

140,576

 

 

 

85,390

 

General and administrative expenses

 

 

18,434

 

 

 

10,749

 

 

 

43,581

 

 

 

38,009

 

TOTAL OPERATING EXPENSES

 

 

77,759

 

 

 

43,322

 

 

 

184,157

 

 

 

123,399

 

OPERATING INCOME (LOSS)

 

 

(31,868

)

 

 

(15,946

)

 

 

(84,153

)

 

 

(43,040

)

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

1,280

 

 

 

2,335

 

 

 

4,972

 

 

 

6,920

 

Other income (expense)

 

 

664

 

 

 

-

 

 

 

1,707

 

 

 

-

 

TOTAL OTHER INCOME (EXPENSE)

 

 

1,944

 

 

 

2,335

 

 

 

6,679

 

 

 

6,920

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(29,924

)

 

 

(13,611

)

 

 

(77,474

)

 

 

(36,120

)

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

NET INCOME (LOSS)

 

 

(29,924

)

 

 

(13,611

)

 

 

(77,474

)

 

 

(36,120

)

NET INCOME (LOSS) PER SHARE - BASIC

 

$

(0.29

)

 

$

(0.13

)

 

$

(0.75

)

 

$

(0.36

)

NET INCOME (LOSS) PER SHARE - DILUTED

 

$

(0.29

)

 

$

(0.13

)

 

$

(0.75

)

 

$

(0.36

)

Weighted average shares outstanding - basic

 

 

104,099

 

 

 

101,843

 

 

 

103,569

 

 

 

100,184

 

Weighted average shares outstanding - diluted

 

 

104,099

 

 

 

101,843

 

 

 

103,569

 

 

 

100,184

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(40

)

 

 

454

 

 

 

44

 

 

 

216

 

COMPREHENSIVE INCOME (LOSS)

 

$

(29,964

)

 

$

(13,157

)

 

$

(77,430

)

 

$

(35,904

)

 

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

 

 

 

2


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Equity

(unaudited)

(In thousands, except per share amounts)

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Non-controlling

Interest

 

 

Totals

 

Balance at March 31, 2020

 

 

101,748

 

 

$

194

 

 

$

936,354

 

 

$

(629

)

 

$

(441,800

)

 

$

(555

)

 

$

493,564

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

10,046

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,046

 

Exercise of stock options

 

 

303

 

 

 

-

 

 

 

2,133

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,133

 

Common stock - restricted stock units vesting

 

 

200

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

454

 

 

 

-

 

 

 

-

 

 

 

454

 

Net income (loss) for the three months ended June 30, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,611

)

 

 

-

 

 

 

(13,611

)

Balance at June 30, 2020

 

 

102,251

 

 

$

194

 

 

$

948,532

 

 

$

(175

)

 

$

(455,411

)

 

$

(555

)

 

$

492,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Totals

 

 

 

 

 

Balance at March 31, 2021

 

 

104,020

 

 

$

196

 

 

$

996,645

 

 

$

102

 

 

$

(551,394

)

 

$

445,549

 

 

 

 

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

18,549

 

 

 

-

 

 

 

-

 

 

 

18,549

 

 

 

 

 

Exercise of stock options

 

 

161

 

 

 

1

 

 

 

2,755

 

 

 

-

 

 

 

-

 

 

 

2,756

 

 

 

 

 

Common stock - restricted stock units vesting

 

 

28

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(40

)

 

 

-

 

 

 

(40

)

 

 

 

 

Net income (loss) for the three months ended June 30, 2021

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(29,924

)

 

 

(29,924

)

 

 

 

 

Balance at June 30, 2021

 

 

104,209

 

 

$

197

 

 

$

1,017,949

 

 

$

62

 

 

$

(581,318

)

 

$

436,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Non-controlling

Interest

 

 

Totals

 

Balance at September 30, 2019

 

 

95,506

 

 

$

187

 

 

$

664,086

 

 

$

(391

)

 

$

(419,291

)

 

$

(555

)

 

$

244,036

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

27,510

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

27,510

 

Exercise of stock options

 

 

989

 

 

 

1

 

 

 

6,463

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,464

 

Common stock - restricted stock units vesting

 

 

1,156

 

 

 

1

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock - issued for cash

 

 

4,600

 

 

 

5

 

 

 

250,474

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

250,479

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

216

 

 

 

-

 

 

 

-

 

 

 

216

 

Net income (loss) for the nine months ended June 30, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(36,120

)

 

 

-

 

 

 

(36,120

)

Balance at June 30, 2020

 

 

102,251

 

 

$

194

 

 

$

948,532

 

 

$

(175

)

 

$

(455,411

)

 

$

(555

)

 

$

492,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Amount ($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Totals

 

 

 

 

 

Balance at September 30, 2020

 

 

102,376

 

 

$

195

 

 

$

965,410

 

 

$

18

 

 

$

(503,844

)

 

$

461,779

 

 

 

 

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

42,051

 

 

 

-

 

 

 

-

 

 

 

42,051

 

 

 

 

 

Exercise of stock options

 

 

981

 

 

 

1

 

 

 

10,489

 

 

 

-

 

 

 

-

 

 

 

10,490

 

 

 

 

 

Common stock - restricted stock units vesting

 

 

852

 

 

 

1

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

Foreign currency translation adjustments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

44

 

 

 

-

 

 

 

44

 

 

 

 

 

Net income (loss) for the nine months ended June 30, 2021

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(77,474

)

 

 

(77,474

)

 

 

 

 

Balance at June 30, 2021

 

 

104,209

 

 

$

197

 

 

$

1,017,949

 

 

$

62

 

 

$

(581,318

)

 

$

436,890

 

 

 

 

 

 

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

 

 

3


 

Arrowhead Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands, except per share amounts)

 

 

 

Nine Months Ended June 30,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(77,474

)

 

$

(36,120

)

Stock-based compensation

 

 

42,051

 

 

 

27,510

 

Depreciation and amortization

 

 

5,763

 

 

 

4,168

 

Amortization/(accretion) of note premiums/discounts

 

 

142

 

 

 

653

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

174

 

 

 

(21,031

)

Prepaid expenses and other current assets

 

 

(2,895

)

 

 

(863

)

Deferred revenue

 

 

211,392

 

 

 

(56,530

)

Accounts payable

 

 

3,208

 

 

 

(3,576

)

Accrued expenses

 

 

13,682

 

 

 

(54

)

Other

 

 

(702

)

 

 

1,302

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

195,341

 

 

 

(84,541

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(15,368

)

 

 

(10,067

)

Purchases of investments

 

 

(95,195

)

 

 

(193,964

)

Proceeds from sale of investments

 

 

87,130

 

 

 

29,148

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

(23,433

)

 

 

(174,883

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from the exercises of stock options

 

 

10,490

 

 

 

6,464

 

Proceeds from the issuance of common stock

 

 

-

 

 

 

250,479

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

10,490

 

 

 

256,943

 

NET INCREASE (DECREASE) IN CASH

 

 

182,398

 

 

 

(2,481

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

143,583

 

 

 

221,804

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

325,981

 

 

$

219,323

 

 

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

 

 

4


 

Arrowhead Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Pharmaceuticals, Inc., a Delaware corporation and its Subsidiaries, (2) the terms “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers to Arrowhead Madison Inc. (“Arrowhead Madison”) and Arrowhead Australia Pty Ltd (“Arrowhead Australia”), (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 (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company’s pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-LUNG2 for chronic obstructive pulmonary disorder, and ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).  ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc. (“Takeda”) in October 2020. JNJ3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.  Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016.

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

During fiscal year 2021, the Company continued to develop its pipeline and partnered candidates.  The Company announced positive interim clinical data on (i) AROAAT2002, an open-label Phase 2 clinical study of ARO-AAT, the Company’s second-generation investigational RNAi therapeutic being co-developed with Takeda as a treatment for the rare genetic liver disease associated with AATD, (ii) AROHSD1001, a Phase 1/2 clinical study of ARO-HSD, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH), and (iii) AROHIF21001, a Phase 1b dose-finding clinical study of ARO-HIF2, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with clear cell renal cell carcinoma.  The Company also presented preclinical data on the development of ARO-DUX4, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with facioscapulohumeral muscular dystrophy (FSHD), at the 28th Annual FSHD Society International Research Congress. The Company hosted a key opinion leader webinar on its cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, and presented positive clinical data from the Phase 1/2 clinical studies of ARO-APOC3 and ARO-ANG3 at the American Heart Association Scientific Sessions 2020.  The Company filed two Investigational New Drug Applications with the United States Food and Drug Administration (the “FDA”) to begin a Phase 2b clinical study of ARO-APOC3 in patients with severe hypertriglyceridemia and a Phase 2b clinical study of ARO-ANG3 in patients with mixed dyslipidemia, and initiated these two Phase 2b clinical studies in the third quarter of fiscal year 2021. In July 2021, the Company voluntarily paused AROENaC1001, a Phase 1/2 clinical study of ARO-ENaC, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with cystic fibrosis, after receiving a preliminary update from an ongoing chronic toxicology study in rats that contained unexpected signals of local lung inflammation.  New screening, enrollment and any further dosing of investigational ARO-ENaC have been paused pending additional data from ongoing nonclinical toxicology studies.  The Company announced two collaborations during the first three quarters of fiscal year 2021: a collaboration with Takeda to co-develop and co-commercialize ARO-AAT for alpha-1 antitrypsin-associated liver disease and a collaboration with Horizon to develop ARO-XDH, an investigational RNAi therapeutic for uncontrolled gout. In July 2021, the Company received Breakthrough Therapy designation from the FDA for ARO-AAT, which is a process designed to expedite the development and review of drugs that are intended to treat a serious life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.  The Company also earned a $10 million payment in connection with Janssen’s exercise of its option right for ARO-JNJ1 in May 2021, which option grants Janssen all rights, including licenses, and obligations to develop and commercialize ARO-JNJ1.  See Note 2 for more information regarding the Company’s collaboration and license agreements.

5


The Company’s partnered candidates under its collaboration agreements also continued 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. The Company is currently performing discovery, optimization and preclinical research and development for ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 for Janssen as part of the Company’s Research Collaboration and Option Agreement with Janssen (“Janssen Collaboration Agreement”).  Under the terms of the Janssen agreements taken together, the Company has received $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”) in Arrowhead Common Stock, and three milestone payments totaling $60.0 million, which include a $10 million payment for Janssen’s exercise of its option right for ARO-JNJ1 in May 2021.  The Company may receive up to $1.6 billion in additional development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in additional 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 on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

The Company’s collaboration agreement with Amgen for Olpasiran (previously referred to as AMG 890 or ARO-LPA) (the “Second Collaboration and License Agreement” or “Olpasiran Agreement”) continues to progress.  In July 2020, Amgen initiated a Phase 2 clinical study, which resulted in a $20.0 million milestone payment to the Company.  The Company has received $35.0 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, $30.0 million in milestone payments, and may receive up to an additional $400.0 million in remaining development, regulatory and sales milestone payments.  The Company is eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement.

On October 7, 2020, the Company entered into an Exclusive License and Co-Funding Agreement with Takeda (the “Takeda License Agreement”).  Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure.  Outside the United States, Takeda will lead the global commercialization strategy and receive an exclusive license to commercialize ARO-AAT with the Company eligible to receive tiered royalties of 20% to 25% on net sales.  In January 2021, the Company received $300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $740.0 million.  

On June 18, 2021, the Company entered into a Collaboration and License Agreement (the “Horizon License Agreement”) with Horizon Therapeutics Ireland DAC (“Horizon”).  Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones.  The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.  

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

The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and nine months ended June 30, 2021 were not significantly impacted by COVID-19. During fiscal year 2020, the Company had temporarily paused enrollment in its two ARO-AAT studies, SEQUOIA and the ARO-AAT 2002 study, but resumed the process of screening and enrolling patients. During the pause in enrollment, patients already enrolled in these studies continued to be dosed per protocol and continued to come in for their follow up visits. Additional delays have occurred in the Company’s earlier stage programs. Additionally, the Company’s operations at its research and development facilities in Madison, Wisconsin and San Diego, California, and its corporate headquarters in Pasadena, California have continued to operate with limited impact, other than for enhanced safety measures, including work from home policies. However, the Company cannot predict the impact 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 and severity of the COVID-19 pandemic.

Liquidity

The Consolidated Financial Statements have been prepared in conformity with the accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern.  Historically, the Company’s primary sources of financing have been through the sale of its securities and revenue from its collaboration agreements. 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. 

6


At June 30, 2021, the Company had $326.0 million in cash and cash equivalents (including $2.4 million in restricted cash), $63.9 million in short-term investments, $126.4 million in marketable securities and $128.4 million in long-term investments to fund operations.  During the nine months ended June 30, 2021, the Company’s cash and investments balance increased by $191.7 million, which was primarily the result of the $300.0 million upfront payment from the Takeda License Agreement, partially offset by cash used to fund the Company’s research and development operations and general and administrative expenses.     

Summary of Significant Accounting Policies

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

Recent Accounting Pronouncements  

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 alignment of unit of account guidance between the two topics. ASU 2018-18 became effective for the Company on October 1, 2020 and did not have a material impact on its Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard requires that certain implementation costs for cloud computing arrangements are capitalized and amortized over the term of the associated hosted cloud computing arrangement service. Capitalized implementation costs are classified in prepaid expenses and other assets. The amortization of the capitalized asset is presented in the same line on the statement of operations and comprehensive loss as the fees for the associated hosted cloud computing arrangement service and not included with depreciation or amortization expense related to property and equipment or intangible assets. Cash flows related to capitalized implementation costs are presented in cash flows used in operating activities. ASU 2018-15 became effective for the Company on October 1, 2020 and did not have a material impact 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. Under the Second Collaboration and License Agreement or Olpasiran Agreement, Amgen has received a worldwide, exclusive license to Arrowhead’s novel, RNAi Olpasiran (previously referred to as AMG 890 or ARO-LPA) program. These RNAi molecules are designed to reduce elevated lipoprotein(a), which is a genetically validated, independent risk factor for atherosclerotic cardiovascular disease. Under the other collaboration and license agreement (the “First Collaboration and License Agreement” or the “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license for ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target. In both agreements, Amgen is wholly responsible for clinical development and commercialization. Under the terms of the agreements taken together, the Company has received $35.0 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, and $30.0 million in milestone payments, and may receive up to an additional $400.0 million in remaining development, regulatory and sales milestone payments. The Company is further eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement. In July 2019, Amgen informed the Company that it would not be exercising its option for an exclusive license for ARO-AMG1, and as such, there will be no further milestone or royalty payments under the ARO-AMG1 Agreement.    

The Company substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 Agreement.  Future milestones and royalties achieved will be recognized in their entirety when earned. In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $20.0 million milestone payment to the Company. During the three months ended June 30, 2021 and 2020, the Company recognized $0 and $20.0 of revenue, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized $0 and $20.0 million of revenue, respectively. As of June 30, 2021, there were $0 in contract assets recorded as accounts receivable and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into the Janssen License Agreement and the Janssen Collaboration Agreement with Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a stock purchase agreement with JJDC (“JJDC Stock Purchase Agreement”).  Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered

7


RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company is responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989.  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 do not include candidates that already were in the Company’s pipeline.  The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, is 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 $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock under the JJDC Stock Purchase Agreement, and three milestone payments totaling $60.0 million, 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 on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

The Company has evaluated these agreements in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of these agreements, the Company identified 1 distinct performance obligation.  Regarding the Janssen License Agreement, the Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibility to complete the Phase 1/2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the “Janssen R&D Services”).  Due to the specialized and unique nature of these Janssen R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.  The Company also determined that Janssen’s option to require the Company to develop up to three new targets is not a material right and, thus, not a performance obligation at the onset of the agreement.  The consideration for this option is accounted for separately.

The Company determined the transaction price totaled approximately $252.7 million, which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, two $25.0 million milestone payments related to JNJ-3989 (ARO-HBV), and estimated payments for reimbursable Janssen R&D Services to be performed.  The Company has allocated the total $252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.  This revenue will be recognized using a proportional performance method (based on actual costs incurred versus total estimated costs incurred) beginning in October 2018 and ending as the Company’s efforts in overseeing the Phase 1/2 clinical trial are completed.  During the three months ended June 30, 2021 and 2020, the Company recognized approximately $0 million and $6.9 million of revenue associated with this performance obligation, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized approximately $20.2 million and $57.9 million of revenue associated with this performance obligation, respectively. As of June 30, 2021, there were $0.4 million in contract assets recorded as accounts receivable, and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.  

The Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 under the Janssen Collaboration Agreement.  All costs and labor hours spent by the Company will be entirely funded by Janssen.  During the three months ended June 30, 2021 and 2020, the Company recognized $0.2 million and $0.4 million of revenue associated with these efforts, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized $0.5 million and $2.4 million of revenue associated with these efforts, respectively. In May 2021, Janssen exercised its option right for ARO-JNJ1, which resulted in a $10.0 million milestone payment to the Company. This $10 million milestone payment was recognized entirely during the three months ended June 30, 2021. As of June 30, 2021, there were $0.3 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.

Takeda Pharmaceuticals U.S.A., Inc.

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

8


The Company has evaluated the Takeda License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Takeda License Agreement, the Company identified 1 distinct performance obligation.  The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of ARO-AAT drug product is completed and delivered to Takeda (the “Takeda R&D Services”).  Due to the specialized and unique nature of these Takeda R&D Services and their direct relationship with the license, the Company determined that these deliverables represent 1 distinct bundle and, thus, one performance obligation.  Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization.  The Company will co-fund certain of the development and commercialization costs that Takeda manages, and these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate.  

The Company determined the initial transaction price totaled approximately $300.0 million, which includes the upfront payment.  The Company has excluded any future estimated milestones, royalties, or profit-sharing payments from this transaction price to date.  The Company has allocated the total $300.0 million initial transaction price to its one distinct performance obligation for the ARO-AAT license and the associated Takeda R&D Services.  Revenue will be recognized using a proportional performance method (based on actual costs incurred versus total estimated costs incurred for the Takeda R&D Services). Revenue for the three months ended June 30, 2021 and 2020 was $35.7 million and $0, respectively. Revenue for the nine months ended June 30, 2021 and 2020 was $69.3 million and $0, respectively. As of June 30, 2021, there were $0 in contract assets recorded as accounts receivable, $150.9 million in contract liabilities recorded as deferred revenue and $79.7 million in contract liabilities recorded as deferred revenue, net of the current portion.                           

Horizon Therapeutics Ireland DAC

On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon.  Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones.  The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.  

The Company has evaluated the Horizon License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Horizon License Agreement, the Company identified one distinct performance obligation.  The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to conduct all activities through the preclinical stages of development of ARO-XDH (the “Horizon R&D Services”).  Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represent 1 distinct bundle and, thus, 1 performance obligation.  Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon will be responsible for managing future clinical development and commercialization of ARO-XDH.  

The Company determined the initial transaction price totaled approximately $40.0 million, which includes the upfront payment.  The Company will exclude any future estimated milestones, royalties, or profit-sharing payments from this transaction price to date.  The Company will allocate the total $40.0 million initial transaction price to its 1 distinct performance obligation for the ARO-XDH license and the associated Horizon R&D Services.  Revenue will be recognized using a proportional performance method. At June 30, 2021, no amounts were recorded on the Company’s Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Income (Loss), as the Company has not performed any substantive Horizon R&D Services.                        

 

 

9


 

NOTE 3. PROPERTY AND EQUIPMENT

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

 

 

 

June 30, 2021

 

 

September 30, 2020

 

 

 

(In thousands)

 

Computers, office equipment and furniture

 

$

1,163

 

 

$

662

 

Research equipment

 

 

23,972

 

 

 

20,654

 

Software

 

 

509

 

 

 

631

 

Leasehold improvements

 

 

42,934

 

 

 

25,238

 

Total gross fixed assets

 

 

68,578

 

 

 

47,185

 

Less: Accumulated depreciation and amortization

 

 

(20,792

)

 

 

(16,304

)

Property and equipment, net

 

$

47,786

 

 

$

30,881

 

 

Depreciation and amortization expense for property and equipment for the three months ended June 30, 2021 and 2020 was $1.6 million and $1.1 million, respectively. Depreciation and amortization expense for property and equipment for the nine months ended June 30, 2021 and 2020 was $4.5 million and $2.9 million, respectively.

 

 

  

NOTE 4. INVESTMENTS

Investments at June 30, 2021 primarily consisted of corporate bonds that have maturities of less than 36 months, a certificate of deposit and marketable equity securities. The Company’s corporate bonds consist of both short-term and long-term bonds and are classified as “held-to-maturity” on the Company’s Consolidated Balance Sheets. The Company’s certificate of deposit matures in less than 24 months and is classified as “held-to-maturity” on the Company’s Consolidated Balance Sheet.  The Company’s marketable equity securities consist of mutual funds that primarily invest in U.S. government bonds, U.S. government agency bonds, corporate bonds and other asset-backed debt securities. Dividends from these funds are automatically reinvested.  The Company may also invest excess cash balances in money market accounts, government-sponsored enterprise securities, and/or commercial paper.  The Company accounts for its held to maturity investments in accordance with FASB ASC 320, Investments – Debt and Equity Securities and its marketable equity securities in accordance with ASC 321, Investments – Equity Securities.  

The following tables summarize the Company’s short-term and long-term investments and marketable securities as of June 30, 2021 and September 30, 2020 by measurement category.

 

Held to Maturity

 

As of June 30, 2021

 

 

 

 

 

(In thousands)

 

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

Commercial notes (due within one year)

 

$

63,924

 

 

$

711

 

 

$

-

 

 

$

64,635

 

 

 

Commercial notes (due within one through three years)

 

$

78,376

 

 

$

1,996

 

 

$

-

 

 

$

80,372

 

 

 

Certificate of deposit (due within two years)

 

$

50,000

 

 

$

-

 

 

$

-

 

 

$

50,000

 

 

 

Total

 

$

192,300

 

 

$

2,707

 

 

$

-

 

 

$

195,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2020

 

 

 

 

 

(In thousands)

 

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

 

Commercial notes (due within one year)

 

$

86,890

 

 

$

1,590

 

 

$

-

 

 

$

88,480

 

 

 

Commercial notes (due within one through three years)

 

$

137,487

 

 

$

4,573

 

 

$

(79

)

 

$

141,981

 

 

 

Total

 

$

224,377

 

 

$

6,163

 

 

$

(79

)

 

$

230,461

 

 

 

10


 

 

Fair Value

 

As of June 30, 2021

 

 

 

(In thousands)

 

 

 

Cost

 

 

Realized

Gains/(Losses)

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Marketable securities

 

$

125,000

 

 

$

1,796

 

 

$

204

 

 

$

(593

)

 

$

126,407

 

Total

 

$

125,000

 

 

$

1,796

 

 

$

204

 

 

$

(593

)

 

$

126,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2020

 

 

 

(In thousands)

 

 

 

Cost

 

 

Realized

Gains/(Losses)

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Marketable securities

 

$

85,000

 

 

$

95

 

 

$

-

 

 

$

(75

)

 

$

85,020

 

Total

 

$

85,000

 

 

$

95

 

 

$

-

 

 

$

(75

)

 

$

85,020

 

 

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

 

NOTE 5. INTANGIBLE ASSETS

Intangible assets subject to amortization include patents and a license agreement capitalized as part of the Novartis RNAi asset acquisition in March 2015. The license agreement associated with the Novartis RNAi asset acquisition is being amortized over the estimated life remaining at the time of acquisition, which was 21 years, and the accumulated amortization of the asset is $0.9 million.  The patents associated with the Novartis RNAi asset acquisition are being amortized over the estimated life remaining at the time of acquisition, which was 14 years, and the accumulated amortization of the assets is $9.8 million. Amortization expense for the three months ended June 30, 2021 and 2020 was $0.4 million and $0.4 million, respectively. Amortization expense for the nine months ended June 30, 2021 and 2020 was $1.3 million and $1.3 million, respectively. Amortization expense is expected to be $0.4 million for the remainder of 2021, $1.7 million in 2022, $1.7 million in 2023, $1.7 million in 2024, $1.7 million in 2025 and $6.9 million thereafter.

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

 

 

 

Intangible

assets

subject to

amortization

 

 

 

(in thousands)

 

Balance at September 30, 2020

 

$

15,363

 

Impairment

 

 

-

 

Amortization

 

 

(1,275

)

Balance at June 30, 2021

 

$

14,088

 

 

 

NOTE 6. STOCKHOLDERS’ EQUITY

At June 30, 2021, 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 June 30, 2021, 104,209,347 shares of Common Stock were outstanding.  At June 30, 2021, 15,381,164 shares of Common Stock were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under Arrowhead’s 2004 Equity Incentive Plan, 2013 Incentive Plan, and 2021 Incentive Plan, as well as for inducement grants made to new employees under Rule 5635(c)(4) of the Nasdaq Listing Rules.

11


NOTE 7. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business.  If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss.  There were 0 contingent liabilities recorded as of the nine months ended June 30, 2021.

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 June 30, 2021, these future commitments were estimated at approximately $177.4 million, of which approximately $39.0 million is expected to be incurred during the remainder of fiscal year 2021.

Technology License Commitments

The Company has licensed from third parties the rights to use certain technologies for its research and development activities, as well as in any products the Company may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments.  Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon a new drug application and upon certain sales level milestones.  These milestone payments could amount to the mid to upper double-digit millions of dollars. During the three and nine months ended June 30, 2021, the Company did 0t reach any milestones. During the three and nine months ended June 30, 2020, the Company accrued milestone payments of $0 and $0.9 million, respectively, related to the progression of the ARO-ENaC program. 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 into a lease for its corporate headquarters in Pasadena, California.  The 91 month office building lease between the Company and 177 Colorado Owner, LLC is for approximately 24,000 square feet of office space located at 177 E. Colorado Blvd, Pasadena, California.  The increased capacity of this new office space compared to the Company’s prior corporate headquarters was intended to accommodate increased personnel as the Company’s pipeline of drug candidates expands and moves closer to market. Lease payments began on September 30, 2019 and are estimated to total approximately $8.7 million over the term.  The lease expires on April 30, 2027.  The Company has paid approximately $3.5 million for leasehold improvements, net of tenant improvement allowances.  The lease contains an option to renew for 1 additional 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 June 30, 2021. On October 23, 2020, the Company entered into a lease expansion to add an additional approximately 24,000 square feet of office space at the same location for its corporate headquarters. Lease payments for the expansion began in July 2021 and the lease for the expansion expires in April 2027. The lease payments for the expansion are expected to total $6.9 million.  The Company anticipates paying approximately $4.2 million of leasehold improvements, net of tenant improvement allowances, for the lease expansion.  The increased capacity of this additional office space compared to the Company’s current corporate headquarters is intended to accommodate increased personnel as the Company’s pipeline of drug candidates continues to expand and move closer to market. 

In January 2016, the Company entered into a lease for its research facility in Madison, Wisconsin.  The lease is for approximately 60,000 square feet of office and laboratory space and has an expiration date of September 30, 2026. The lease was amended in January 2019 and May 2020 to expand the rentable square feet by an additional 40,000 total square feet and extend the lease expiration date to September 30, 2031. Lease payments are estimated to total approximately $26.2 million for the term. The Company incurred approximately $11.0 million of leasehold improvements for the additional 40,000 square feet, net of tenant improvement allowances. The lease contains 2 options to renew for two additional 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 June 30, 2021.  In November 2020 and December 2020, the Company entered into amendments to expand the rentable square space by an additional 10,743 square feet and these amendments added a total of approximately $1.2 million of lease payments for the remainder of the term.            

 

12


 

In March 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 Sublease is for approximately 21,000 rentable square feet.  The term of the Sublease commenced on April 1, 2020 and will end on January 14, 2023.  Sublease payments are estimated to total approximately $2.0 million over the term.

Operating lease cost during the three months ended June 30, 2021 and 2020 was $1.6 million and $0.8 million, respectively. Operating lease cost during the nine months ended June 30, 2021 and 2020 was $3.6 million and $1.7 million, respectively. Variable lease costs for the three months ended June 30, 2021 and 2020 was $0.1 million and $0.2 million, respectively. Variable lease costs for the nine months ended June 30, 2021 and 2020 was $0.6 million and $0.6 million, respectively.   There was 0 short-term lease cost during the three and nine months ended June 30, 2021 and 2020.

The following table presents maturities of operating lease liabilities on an undiscounted basis as of June 30, 2021:

 

 

 

(in thousands)

 

2021 (remainder of fiscal year)

 

$

964

 

2022

 

 

4,522

 

2023

 

 

4,624

 

2024

 

 

4,523

 

2025

 

 

4,649

 

2026 and thereafter

 

 

17,422

 

Total

 

$

36,704

 

Less imputed interest

 

$

(12,560

)

Total operating lease liabilities (includes current portion)

 

$

24,144

 

 

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 nine months ended June 30, 2021 and 2020 was $2.2 million and $1.1 million, respectively. The weighted-average remaining lease term and weighted-average discount rate for all leases as of June 30, 2021 was 8.3 years and 8.5%, respectively.

    

 

NOTE 9. STOCK-BASED COMPENSATION

 

Arrowhead has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, as of June 30, 2021, 429,141 and 5,293,368 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 June 30, 2021, there were options granted and outstanding to purchase 429,141 and 2,127,918 shares of Common Stock under the 2004 Equity Incentive Plan and the 2013 Incentive Plan, respectively, and there were 3,165,450 restricted stock units granted and outstanding under the 2013 Incentive Plan. Also, as of June 30, 2021, there were 1,001,516 shares reserved for options and 636,700 shares reserved for restricted stock units issued as inducement grants to new employees outside of equity compensation plans. On March 18, 2021, the Company’s stockholders approved the Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan (“2021 Incentive Plan”), which authorizes 8,000,000 shares (subject to certain adjustments) to be awarded for grants of stock options, stock appreciation rights, restricted and unrestricted stock and stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of Arrowhead’s Common Stock. The maximum number of shares authorized under the 2021 Incentive Plan will be (i) reduced by any shares subject to awards made under the 2013 Incentive Plan after January 1, 2021, and (ii) increased by any shares subject to outstanding awards under the 2013 Incentive Plan as of January 1, 2021 that, after January 1, 2021, are canceled, expired, forfeited or otherwise not issued under such awards (other than as a result of being tendered or withheld to pay the exercise price or withholding taxes in connection with any such awards) or settled in cash. As of June 30, 2021, there were options granted and outstanding to purchase 18,000 shares of Common Stock and 43,500 restricted stock units granted and outstanding under the 2021 Incentive Plan. As of June 30, 2021, the total number of authorized shares under the 2021 Incentive Plan was 8,020,439 shares, which includes 81,939 shares that were forfeited under the 2013 Incentive Plan.      

 

13


 

Stock Options

The following table summarizes information about stock options:

 

 

 

Number of

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price

Per Share

 

 

Weighted-

Average

Remaining

Contractual

Term

 

Aggregate

Intrinsic

Value

 

Balance at September 30, 2020

 

 

4,539,403

 

 

$

16.67

 

 

 

 

 

 

 

Granted

 

 

186,000

 

 

65.57

 

 

 

 

 

 

 

Cancelled

 

 

(167,609

)

 

34.86

 

 

 

 

 

 

 

Exercised

 

 

(981,219

)

 

10.69

 

 

 

 

 

 

 

Balance at June 30, 2021

 

 

3,576,575

 

 

$

20.00

 

 

5.9 years

 

$

224,666,017

 

Exercisable at June 30, 2021

 

 

2,417,915

 

 

$

11.18

 

 

4.7 years

 

$

173,212,122

 

 

 

Stock-based compensation expense related to stock options for the three months ended June 30, 2021 and 2020 was $3.2 million and $2.7 million, respectively. Stock-based compensation expense related to stock options for the nine months ended June 30, 2021 and 2020 was $9.6 million and $6.8 million, respectively. For non-qualified stock options, the expense creates a timing difference, resulting in a deferred tax asset, which is fully reserved by a valuation allowance.

The grant date fair value of the options granted by the Company for the three months ended June 30, 2021 and 2020 was $0.9 million and $3.4 million, respectively. The grant date fair value of the options granted by the Company for the nine months ended June 30, 2021 and 2020 was $9.0 million and $30.0 million, respectively.  

The intrinsic value of the options exercised during the three months ended June 30, 2021 and 2020 was $10.2 million and $9.5 million, respectively. The intrinsic value of the options exercised during the nine months ended June 30, 2021 and 2020 was $63.0 million and $39.8 million, respectively.

As of June 30, 2021, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $31.3 million will be recognized in the Company’s results of operations over a weighted average period of 2.7 years.

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

The assumptions used to value stock options are as follows:

 

 

 

Nine Months Ended June 30,

 

 

 

 

2021

 

 

2020

 

 

Dividend yield

 

 

-

 

 

 

-

 

 

Risk-free interest rate

 

0.4 – 1.1%

 

 

0.4 – 1.8%

 

 

Volatility

 

86.2 – 90.4%

 

 

90.5 – 91.9%

 

 

Expected life (in years)

 

 

6.25

 

 

 

6.25

 

 

Weighted average grant date fair value per share of options granted

 

$

48.64

 

 

$

38.12

 

 

 

 

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.

14


Restricted Stock Units

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

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

 

 

 

Number of

RSUs

 

 

Weighted-

Average

Grant

Date

Fair Value

 

Unvested at September 30, 2020

 

 

3,524,025

 

 

$

44.11

 

Granted

 

 

1,488,450

 

 

 

75.29

 

Vested

 

 

(851,825

)

 

 

30.41

 

Forfeited

 

 

(315,000

)

 

 

39.93

 

Unvested at June 30, 2021

 

 

3,845,650

 

 

$

59.55

 

 

 

During the three months ended June 30, 2021 and 2020, the Company recorded $15.4 million and $7.4 million of expense related to RSUs, respectively. During the nine months ended June 30, 2021 and 2020, the Company recorded $32.5 million and $20.7 million 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. The grant date fair value of the RSUs granted by the Company for the three months ended June 30, 2021 and 2020 was $3.1 million and $5.9 million, respectively. The grant date fair value of the RSUs granted by the Company for the nine months ended June 30, 2021 and 2020 was $112.1 million and $141.8 million, respectively.

As of June 30, 2021, the pre-tax compensation expense for all unvested RSUs in the amount of $123.5 million will be recognized in the Company’s results of operations over a weighted average period of 2.7 years.  Unvested RSUs that we have deemed not probable of vesting as of June 30, 2021, have the potential of generating an additional $70.1 million of pre-tax compensation expense if we deem them probable of vesting in a future reporting period.  

      

 

 

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.

15


The following table summarizes fair value measurements at June 30, 2021 and September 30, 2020 for assets and liabilities measured at fair value on a recurring basis.  

June 30, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

325,981

 

 

$

-

 

 

$

-

 

 

$

325,981

 

Marketable securities

 

$

126,407

 

 

$

-

 

 

$

-

 

 

$

126,407

 

Short-term investments (held to maturity)

 

$

-

 

 

$

64,635

 

 

$

-

 

 

$

64,635

 

Long-term investments (held to maturity)

 

$

-

 

 

$

130,372

 

 

$

-

 

 

$

130,372

 

Contingent consideration

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

September 30, 2020:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

143,583

 

 

$

-

 

 

$

-

 

 

$

143,583

 

Marketable securities

 

$

85,020

 

 

$

-

 

 

$

-

 

 

$

85,020

 

Short-term investments (held to maturity)

 

$

-

 

 

$

88,480

 

 

$

-

 

 

$

88,480

 

Long-term investments (held to maturity)

 

$

-

 

 

$

141,981

 

 

$

-

 

 

$

141,981

 

Contingent consideration

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

    

16


 

ITEM  2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In addition, many of these risks and uncertainties may be exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. As such, our actual results may differ materially from those expressed in any forward-looking statements. Readers should carefully review the factors identified in our most recent Annual Report on Form 10-K under the caption “Risk Factors” as well as the additional risks and uncertainties described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including our Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and this Quarterly Report 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

Description of Business

Unless otherwise noted, (1) the term “Arrowhead” refers to Arrowhead Pharmaceuticals, Inc., a Delaware corporation and its Subsidiaries, (2) the terms “Company,” “we,” “us,” and “our,” refer to the ongoing business operations of Arrowhead and its Subsidiaries, whether conducted through Arrowhead or a subsidiary of Arrowhead, (3) the term “Subsidiaries” refers to Arrowhead Madison Inc. (“Arrowhead Madison”) and Arrowhead Australia Pty Ltd (“Arrowhead Australia”), (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.

Overview

Arrowhead Pharmaceuticals, Inc. develops medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, Arrowhead therapies trigger the RNA interference mechanism to induce rapid, deep and durable knockdown of target genes. RNA interference (“RNAi”) is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. Arrowhead’s RNAi-based therapeutics leverage this natural pathway of gene silencing. The Company’s pipeline includes ARO-APOC3 for hypertriglyceridemia, ARO-ANG3 for dyslipidemia, ARO-HSD for liver disease, ARO-ENaC for cystic fibrosis, ARO-HIF2 for renal cell carcinoma, ARO-DUX4 for facioscapulohumeral muscular dystrophy, ARO-LUNG2 for chronic obstructive pulmonary disorder, and ARO-COV for the coronavirus that causes COVID-19 and other possible future pulmonary-borne pathogens. ARO-XDH is being developed for uncontrolled gout under a collaboration agreement with Horizon Therapeutics Ireland DAC (“Horizon”). ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 are being developed for undisclosed liver-expressed targets under a collaboration agreement with Janssen Pharmaceuticals, Inc. (“Janssen”).  ARO-AAT for liver disease associated with alpha-1 antitrypsin deficiency (“AATD”) was out-licensed to Takeda Pharmaceuticals U.S.A., Inc. (“Takeda”) in October 2020. JNJ3989 (formerly referred to as ARO-HBV) for chronic hepatitis B virus was out-licensed to Janssen in October 2018.  Olpasiran (formerly referred to as AMG 890 or ARO-LPA) for cardiovascular disease was out-licensed to Amgen Inc. (“Amgen”) in 2016.

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

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.  

17


During fiscal year 2021, the Company continued to develop its pipeline and partnered candidates.  The Company announced positive interim clinical data on (i) AROAAT2002, an open-label Phase 2 clinical study of ARO-AAT, the Company’s second-generation investigational RNAi therapeutic being co-developed with Takeda as a treatment for the rare genetic liver disease associated with AATD, (ii) AROHSD1001, a Phase 1/2 clinical study of ARO-HSD, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with alcohol-related and nonalcohol related liver diseases, such as nonalcoholic steatohepatitis (NASH), and (iii) AROHIF21001, a Phase 1b dose-finding clinical study of ARO-HIF2, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with clear cell renal cell carcinoma.  The Company also presented preclinical data on the development of ARO-DUX4, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with facioscapulohumeral muscular dystrophy (FSHD), at the 28th Annual FSHD Society International Research Congress. The Company hosted a key opinion leader webinar on its cardiometabolic candidates, ARO-APOC3 and ARO-ANG3, and presented positive clinical data from the Phase 1/2 clinical studies of ARO-APOC3 and ARO-ANG3 at the American Heart Association Scientific Sessions 2020.  The Company filed two Investigational New Drug Applications with the United States Food and Drug Administration (the “FDA”) to begin a Phase 2b clinical study of ARO-APOC3 in patients with severe hypertriglyceridemia and a Phase 2b clinical study of ARO-ANG3 in patients with mixed dyslipidemia, and initiated these two Phase 2b clinical studies in the third quarter of fiscal year 2021.  In July 2021, the Company voluntarily paused AROENaC1001, a Phase 1/2 clinical study of ARO-ENaC, the Company’s investigational RNAi therapeutic being developed as a treatment for patients with cystic fibrosis, after receiving a preliminary update from an ongoing chronic toxicology study in rats that contained unexpected signals of local lung inflammation.  New screening, enrollment and any further dosing of investigational ARO-ENaC have been paused pending additional data from ongoing nonclinical toxicology studies.  The Company announced two collaborations during the first three quarters of fiscal year 2021: a collaboration with Takeda to co-develop and co-commercialize ARO-AAT for alpha-1 antitrypsin-associated liver disease and a collaboration with Horizon to develop ARO-XDH, an investigational RNAi therapeutic for uncontrolled gout. In July 2021, the Company received Breakthrough Therapy designation from the FDA for ARO-AAT, which is a process designed to expedite the development and review of drugs that are intended to treat a serious life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.  The Company also earned a $10 million payment in connection with Janssen’s exercise of its option right for ARO-JNJ1 in May 2021, which option grants Janssen all rights, including licenses, and obligations to develop and commercialize ARO-JNJ1.  See Note 2 for more information regarding the Company’s collaboration and license agreements.

The Company’s partnered candidates under its collaboration agreements also continued 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.   The Company is currently performing discovery, optimization and preclinical research and development for ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 for Janssen as part of the Company’s Research Collaboration and Option Agreement with Janssen (“Janssen Collaboration Agreement”).  Under the terms of the Janssen agreements taken together, the Company has received $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by Johnson & Johnson Innovation-JJDC, Inc. (“JJDC”) in Arrowhead Common Stock, and three milestone payments totaling $60.0 million, which include a $10 million payment for Janssen’s exercise of its option right for ARO-JNJ1 in May 2021.  The Company may receive up to $1.6 billion in additional development and sales milestones payments for the Janssen License Agreement, and up to $1.9 billion in additional 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 on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

The Company’s collaboration agreement with Amgen for Olpasiran (previously referred to as AMG 890 or ARO-LPA) (the “Second Collaboration and License Agreement” or “Olpasiran Agreement”) continues to progress.  In July 2020, Amgen initiated a Phase 2 clinical study, which resulted in a $20.0 million milestone payment to the Company.  The Company has received $35.0 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock, $30.0 million in milestone payments, and may receive up to an additional $400.0 million in remaining development, regulatory and sales milestone payments.  The Company is eligible to receive up to low double-digit royalties for sales of products under the Olpasiran Agreement.

On October 7, 2020, the Company entered into an Exclusive License and Co-Funding Agreement with Takeda (the “Takeda License Agreement”).  Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure.  Outside the United States, Takeda will lead the global commercialization strategy and receive an exclusive license to commercialize ARO-AAT with the Company eligible to receive tiered royalties of 20% to 25% on net sales.  In January 2021, the Company received $300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $740.0 million.  

18


On June 18, 2021, the Company entered into a Collaboration and License Agreement (the “Horizon License Agreement”) with Horizon Therapeutics Ireland DAC (“Horizon”).  Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones.  The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.  The revenue recognition for these collaboration agreements is discussed further in Note 2 of the Notes to Consolidated Financial Statements of Part I, Item 1. Financial Statements of this Quarterly Report on Form 10-Q.

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 manufacturers 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 “candidate costs.”  If the clinical candidates progress through human testing, candidate costs will increase. 

The Company is actively monitoring the ongoing COVID-19 pandemic. The financial results for the three and nine months ended June 30, 2021 were not significantly impacted by COVID-19. During fiscal year 2020, the Company had temporarily paused enrollment in its two ARO-AAT studies, SEQUOIA and the ARO-AAT 2002 study, but resumed the process of screening and enrolling patients. During the pause in enrollment, patients already enrolled in these studies continued to be dosed per protocol and continued to come in for their follow up visits. Additional delays have occurred in the Company’s earlier stage programs. Additionally, the Company’s operations at its research and development facilities in Madison, Wisconsin and San Diego, California, and its corporate headquarters in Pasadena, California have continued to operate with limited impact, other than for enhanced safety measures, including work from home policies. However, the Company cannot predict the impact 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 and severity of the COVID-19 pandemic.

Net losses were $29.9 million for the three months ended June 30, 2021 as compared to net losses of $13.6 million for the three months ended June 30, 2020. Net losses were $77.5 million for the nine months ended June 30, 2021 as compared to net losses of $36.1 million for the nine months ended June 30, 2020. Net losses per share-diluted were $0.29 for the three months ended June 30, 2021 as compared to net losses per share-diluted of $0.13 for the three months ended June 30, 2020. Net losses per share-diluted were $0.75 for the nine months ended June 30, 2021 as compared to net losses per share-diluted of $0.36 for the nine months ended June 30, 2020. The increase in net losses for the three and nine months ended June 30, 2021 was due to an increase in research and development expenses as the Company’s pipeline of candidates has expanded and progressed through clinical trial phases, partially offset by an increase in revenue from the Company’s license and collaboration agreements, primarily from the Takeda collaboration.  

The Company has strengthened its liquidity and financial position through upfront and milestone payments received under its collaboration agreements, as well as equity financings. Under the terms of the Company’s agreements with Janssen taken together, the Company has received $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock, and three milestone payments totaling $60.0 million. Under the terms of the Company’s agreements with Amgen, the Company has received $35.0 million in upfront payments, $21.5 million in the form of an equity investment by Amgen in the Company’s Common Stock and $30.0 million in milestone payments. The Company’s October 2020 licensing agreement with Takeda resulted in a $300.0 million upfront payment, which was collected in the beginning of the second quarter of 2021. The Company had $326.0 million of cash and cash equivalents, $126.4 million of marketable securities, $63.9 million in short-term investments, $128.4 million of long term investments and $734.9 million of total assets as of June 30, 2021, as compared to $143.6 million of cash and cash equivalents, $85.0 million of marketable securities, $86.9 million in short-term investments, $137.5 million of long term investments and $522.5 million of total assets as of September 30, 2020, 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.

Critical Accounting Policies and Estimates

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

19


Results of Operations

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

 

 

 

Three Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands, except per share

amounts)

 

Revenues

 

$

45,891

 

 

$

27,376

 

Operating Income (loss)

 

$

(31,868

)

 

$

(15,946

)

Net Income (loss)

 

$

(29,924

)

 

$

(13,611

)

Net Income (Loss) per Share-Diluted

 

$

(0.29

)

 

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands, except per share

amounts)

 

Revenues

 

$

100,004

 

 

$

80,359

 

Operating Income (loss)

 

$

(84,153

)

 

$

(43,040

)

Net Income (loss)

 

$

(77,474

)

 

$

(36,120

)

Net Income (Loss) per Share-Diluted

 

$

(0.75

)

 

$

(0.36

)

 

The increase in revenue for the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020 was driven by the revenue recognized for the Takeda collaboration. The increase in net losses during the three and nine months ended June 30, 2021 compared to the three and nine months ended June 30, 2020 was driven by an increase in research and development expenses as our pipeline of clinical candidates has continued to increase and progress through clinical trial phases, partially offset by an increase in revenue from the Takeda License Agreement.

Revenue

Total revenue for the three months ended June 30, 2021 and 2020 was $45.9 million and $27.4 million, respectively. Total revenue for the nine months ended June 30, 2021 and 2020 was $100.0 million and $80.4 million, respectively.  Revenue for the three months ended June 30, 2021 is primarily related to the recognition of $35.7 million of revenue associated with the Takeda License Agreement and the $10 million milestone payment from Janssen for ARO-JNJ1. Revenue for the nine months ended June 30, 2021 is primarily related to the recognition of $69.3 million of revenue associated with the Takeda License Agreement, the recognition of a portion of the $252.7 million initial transaction price associated with our agreements with Janssen and JJDC for the progress we achieved towards completing our performance obligations under those agreements, and the $10 million milestone payment from Janssen for ARO-JNJ1.

Amgen Inc.

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

The Company substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 Agreement.  Future milestones and royalties achieved will be recognized in their entirety when earned. In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $20.0 million milestone payment to the Company. During the three months ended June 30, 2021 and 2020, the Company recognized $0 and $20.0 of revenue, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized $0 and $20 million of revenue, respectively. As of June 30, 2021, there were $0 in contract assets recorded as accounts receivable and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.

20


Janssen Pharmaceuticals, Inc.

On October 3, 2018, the Company entered into the Janssen License Agreement and the Janssen Collaboration Agreement with Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson.  The Company also entered into a stock purchase agreement with JJDC (“JJDC Stock Purchase Agreement”).  Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company is responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989.  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 do not include candidates that already were in the Company’s pipeline.  The Company will perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, is 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 $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by JJDC in Arrowhead Common Stock under the JJDC Stock Purchase Agreement, and three milestone payments totaling $60.0 million, 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 on product sales up to mid-teens under the Janssen License Agreement and up to low teens under the Janssen Collaboration Agreement.

The Company has evaluated these agreements in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018.  At the inception of these agreements, the Company 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 Phase 1/2 study of JNJ-3989 (ARO-HBV) and the Company’s responsibility to ensure certain manufacturing of JNJ-3989 (ARO-HBV) drug product is completed and delivered to Janssen (the “Janssen R&D Services”).  Due to the specialized and unique nature of these Janssen R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.  The Company also determined that Janssen’s option to require the Company to develop up to three new targets is not a material right and, thus, not a performance obligation at the onset of the agreement.  The consideration for this option is accounted for separately.

The Company determined the transaction price totaled approximately $252.7 million, which includes the upfront payment, the premium paid by JJDC for its equity investment in the Company, two $25.0 million milestone payments related to JNJ-3989 (ARO-HBV), and estimated payments for reimbursable Janssen R&D Services to be performed.  The Company has allocated the total $252.7 million initial transaction price to its one distinct performance obligation for the JNJ-3989 (ARO-HBV) license and the associated Janssen R&D Services.  This revenue will be recognized using a proportional performance method (based on actual costs incurred versus total estimated costs incurred) beginning in October 2018 and ending as the Company’s efforts in overseeing the Phase 1/2 clinical trial are completed.  During the three months ended June 30, 2021 and 2020, the Company recognized approximately $0 million and $6.9 million of revenue associated with this performance obligation, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized approximately $20.2 million and $57.9 million of revenue associated with this performance obligation, respectively. As of June 30, 2021, there were $0.4 million in contract assets recorded as accounts receivable, and $0 of contract liabilities recorded as current deferred revenue on the Company’s Consolidated Balance Sheets.  

The Company has begun to conduct its discovery, optimization and preclinical research and development of ARO-JNJ1, ARO-JNJ2 and ARO-JNJ3 under the Janssen Collaboration Agreement.  All costs and labor hours spent by the Company will be entirely funded by Janssen.  During the three months ended June 30, 2021 and 2020, the Company recognized $0.2 million and $0.4 million of revenue associated with these efforts, respectively. During the nine months ended June 30, 2021 and 2020, the Company recognized $0.5 million and $2.4 million of revenue associated with these efforts, respectively. In May 2021, Janssen exercised its option right for ARO-JNJ1, which resulted in a $10.0 million milestone payment to the Company. This $10 million milestone payment was recognized entirely during the three months ended June 30, 2021. As of June 30, 2021, there were $0.3 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.

Takeda Pharmaceuticals U.S.A., Inc.

On October 7, 2020, the Company entered into the Takeda License Agreement with Takeda.  Under the Takeda License Agreement, Takeda and the Company will co-develop the Company’s ARO-AAT program, the Company’s second-generation subcutaneously administered RNAi therapeutic candidate being developed as a treatment for liver disease associated with alpha-1

21


antitrypsin deficiency. Within the United States, ARO-AAT, if approved, will be co-commercialized under a 50/50 profit sharing structure.  Outside the United States, Takeda will lead the global commercialization strategy and receive an exclusive license to commercialize ARO-AAT with the Company eligible to receive tiered royalties of 20% to 25% on net sales.  In January 2021, the Company received $300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $740.0 million.  

The Company has evaluated the Takeda License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Takeda License Agreement, the Company identified one distinct performance obligation.  The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to complete the initial portion of the SEQUOIA study, to complete the ongoing Phase 2 AROAAT2002 study and to ensure certain manufacturing of ARO-AAT drug product is completed and delivered to Takeda (the “Takeda R&D Services”).  Due to the specialized and unique nature of these Takeda R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.  Beyond the Takeda R&D Services, which are the responsibility of the Company, Takeda will be responsible for managing future clinical development and commercialization.  The Company will co-fund certain of the development and commercialization costs that Takeda manages, and these co-funding amounts will be recorded as Research and Development Expenses or General and Administrative Expenses, as appropriate.  

The Company determined the initial transaction price totaled approximately $300.0 million, which includes the upfront payment.  The Company has excluded any future estimated milestones, royalties, or profit-sharing payments from this transaction price to date.  The Company has allocated the total $300.0 million initial transaction price to its one distinct performance obligation for the ARO-AAT license and the associated Takeda R&D Services.  Revenue will be recognized using a proportional performance method (based on actual costs incurred versus total estimated costs incurred for the Takeda R&D Services). Revenue for the three months ended June 30, 2021 and 2020 was $35.7 million and $0, respectively. Revenue for the nine months ended June 30, 2021 and 2020 was $69.3 million and $0, respectively. As of June 30, 2021, there were $0 in contract assets recorded as accounts receivable, $150.9 million in contract liabilities recorded as deferred revenue and $79.7 million in contract liabilities recorded as deferred revenue, net of the current portion.                             

Horizon Therapeutics Ireland DAC

On June 18, 2021, the Company entered into the Horizon License Agreement with Horizon.  Under the Horizon License Agreement, Horizon has received a worldwide exclusive license for ARO-XDH, a previously undisclosed discovery-stage investigational RNAi therapeutic being developed by the Company as a potential treatment for people with uncontrolled gout. The Company will conduct all activities through the preclinical stages of development of ARO-XDH, and Horizon will be wholly responsible for clinical development and commercialization of ARO-XDH. In July 2021, the Company received $40 million as an upfront payment and is eligible to receive up to $660 million in potential development, regulatory and sales milestones.  The Company is also eligible to receive royalties in the low- to mid-teens range on net product sales.   

The Company has evaluated the Horizon License Agreement in accordance with FASB Topic 606 - Revenue for Contracts from Customers, which became effective for the Company on October 1, 2018. At the inception of the Horizon License Agreement, the Company identified one distinct performance obligation.  The Company determined that the key deliverables included the license and certain R&D services including the Company’s responsibilities to conduct all activities through the preclinical stages of development of ARO-XDH (the “Horizon R&D Services”).  Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represent one distinct bundle and, thus, one performance obligation.  Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon will be responsible for managing future clinical development and commercialization of ARO-XDH.  

The Company determined the initial transaction price totaled approximately $40.0 million, which includes the upfront payment.  The Company will exclude any future estimated milestones, royalties, or profit-sharing payments from this transaction price to date.  The Company will allocate the total $40.0 million initial transaction price to its one distinct performance obligation for the ARO-XDH license and the associated Horizon R&D Services.  Revenue will be recognized using a proportional performance method. At June 30, 2021, no amounts were recorded on the Company’s Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Income (Loss), as the Company has not performed any substantive Horizon R&D Services.                         

22


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 nine months ended June 30, 2021 and 2020 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 facilities in Madison, Wisconsin and San Diego, California, 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 research facilities.  We do not separately track R&D expenses by individual research and development projects, including by individual drug candidates. The Company operates in a cross-functional manner across projects and does not separately allocate facilities-related costs, candidate costs, discovery costs, compensation expenses, depreciation and amortization expenses, and other expenses for research and development activities.  The following table provides details of research and development expenses for the periods indicated:

(table below in thousands)

 

 

 

Three

 

 

 

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

Months

Ended

 

 

% of

Expense

 

 

Months

Ended

 

 

% of

Expense

 

 

Increase (Decrease)

 

 

 

June 30, 2021

 

 

Category

 

 

June 30, 2020

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

8,518

 

 

 

14

%

 

$

4,861

 

 

 

15

%

 

$

3,657

 

 

 

75

%

Facilities related

 

 

1,306

 

 

 

2

%

 

 

1,209

 

 

 

4

%

 

 

97

 

 

 

8

%

Candidate costs

 

 

31,468

 

 

 

53

%

 

 

15,755

 

 

 

48

%

 

 

15,713

 

 

 

100

%

R&D discovery costs

 

 

10,082

 

 

 

17

%

 

 

4,070

 

 

 

13

%

 

 

6,012

 

 

 

148

%

Total research and development expense, excluding non-cash expense

 

 

51,374

 

 

 

87

%

 

 

25,895

 

 

 

80

%

 

 

25,479

 

 

 

98

%

Stock compensation

 

 

6,530

 

 

 

11

%

 

 

5,296

 

 

 

16

%

 

 

1,234

 

 

 

23

%

Depreciation/amortization

 

 

1,421

 

 

 

2

%

 

 

1,382

 

 

 

4

%

 

 

39

 

 

 

3

%

Total research and development expense

 

$

59,325

 

 

 

100

%

 

$

32,573

 

 

 

100

%

 

$

26,752

 

 

 

82

%

 

 

 

Nine

 

 

 

 

 

 

Nine

 

 

 

 

 

 

 

 

 

 

Months

Ended

 

 

% of

Expense

 

 

Months

Ended

 

 

% of

Expense

 

 

Increase (Decrease)

 

 

 

June 30, 2021

 

 

Category

 

 

June 30, 2020

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

25,375

 

 

 

18

%

 

$

13,173

 

 

 

15

%

 

$

12,202

 

 

 

93

%

Facilities related

 

 

4,456

 

 

 

3

%

 

 

2,653

 

 

 

3

%

 

 

1,803

 

 

 

68

%

Candidate costs

 

 

67,152

 

 

 

48

%

 

 

44,901

 

 

 

53

%

 

 

22,251

 

 

 

50

%

R&D discovery costs

 

 

20,295

 

 

 

14

%

 

 

11,540

 

 

 

14

%

 

 

8,755

 

 

 

76

%

Total research and development expense, excluding non-cash expense

 

$

117,278

 

 

 

84

%

 

$

72,267

 

 

 

85

%

 

$

45,011

 

 

 

62

%

Stock compensation

 

 

18,421

 

 

 

13

%

 

 

9,411

 

 

 

11

%

 

 

9,010

 

 

 

96

%

Depreciation/amortization

 

 

4,877

 

 

 

4

%

 

 

3,712

 

 

 

4

%

 

 

1,165

 

 

 

31

%

Total research and development expense

 

$

140,576

 

 

 

100

%

 

$

85,390

 

 

 

100

%

 

$

55,186

 

 

 

65

%

 

 

Salaries expense increased by $3,657,000 from $4,861,000 during the three months ended June 30, 2020 to $8,518,000 during the current period. Salaries expense increased by $12,202,000 from $13,173,000 during the nine months ended June 30, 2020 to $25,375,000 during the current period.  This increase is primarily due to an increase in R&D headcount that has occurred as the Company has expanded its pipeline of candidates. We anticipate this expense to continue to increase as we continue to expand our pipeline of candidates and increase headcount to support our discovery efforts to identify new drug candidates

23


Facilities expense increased by $97,000 from $1,209,000 during the three months ended June 30, 2020 to $1,306,000 during the current period. Facilities expense increased by $1,803,000 from $2,653,000 during the nine months ended June 30, 2020 to $4,456,000 during the current period. This category includes rental costs for our research and development facilities in Madison, Wisconsin and San Diego, California. This increase is primarily due to the commencement of our sublease in San Diego, California in April 2020 and the lease expansion at our Madison facility in May 2020.

Candidate costs increased by $15,713,000 from $15,755,000 during the three months ended June 30, 2020 to $31,468,000 during the current period. Candidate costs increased by $22,251,000 from $44,901,000 during the nine months ended June 30, 2020 to $67,152,000 during the current period. This increase is primarily due to the progression of our pipeline of candidates into and through clinical trials, which results in higher outsourced clinical trial, toxicity study and manufacturing costs. We anticipate these expenses to continue to increase as our pipeline of candidates grows and progresses to later phase clinical trials.

R&D discovery costs increased by $6,012,000 from $4,070,000 during the three months ended June 30, 2020 to $10,082,000 in the current period. R&D discovery costs increased by $8,755,000 from $11,540,000 during the nine months ended June 30, 2020 to $20,295,000 in the current period. This increase is primarily due to the growth of our discovery efforts, including the addition of our research facility in San Diego. We anticipate this expense to continue to increase as we increase headcount to support our discovery efforts to identify new drug candidates.

Stock compensation expense, a non-cash expense, increased by $1,234,000 from $5,296,000 during the three months ended June 30, 2020 to $6,530,000 during the current period. Stock compensation expense, a non-cash expense, increased by $9,010,000 from $9,411,000 during the nine months ended June 30, 2020 to $18,421,000 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 in the current period is primarily due to the increased headcount discussed above and a mix of higher grant date fair values of awards amortizing during the current period due to the Company’s stock price at the time of the grants. We generally expect future stock compensation expense to increase as our headcount continues to increase to support our clinical pipeline.  

Depreciation and amortization expense, a non-cash expense, increased by $39,000 from $1,382,000 during the three months ended June 30, 2020 to $1,421,000 during the current period. Depreciation and amortization expense, a non-cash expense, increased by $1,165,000 from $3,712,000 during the nine months ended June 30, 2020 to $4,877,000 during the current period.  The majority of depreciation and amortization expense relates to depreciation on lab equipment and leasehold improvements at our Madison and San Diego research facilities.

General & Administrative Expenses

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

(table below in thousands)

 

 

 

Three

 

 

 

 

 

 

Three

 

 

 

 

 

 

 

 

 

 

Months

Ended

 

 

% of

Expense

 

 

Months

Ended

 

 

% of

Expense

 

 

Increase (Decrease)

 

 

 

June 30, 2021

 

 

Category

 

 

June 30, 2020

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

2,570

 

 

 

14

%

 

$

2,633

 

 

 

25

%

 

$

(63

)

 

 

-2

%

Professional/outside services

 

 

379

 

 

 

2

%

 

 

2,020

 

 

 

19

%

 

 

(1,641

)

 

 

-81

%

Facilities related

 

 

610

 

 

 

3

%

 

 

446

 

 

 

4

%

 

 

164

 

 

 

37

%

Other G&A

 

 

2,278

 

 

 

12

%

 

 

746

 

 

 

7

%

 

 

1,532

 

 

 

205

%

Total general & administrative expense, excluding non-cash expense

 

 

5,837

 

 

 

32

%

 

 

5,845

 

 

 

54

%

 

 

(8

)

 

 

159

%

Stock compensation

 

 

12,020

 

 

 

65

%

 

 

4,750

 

 

 

44

%

 

 

7,270

 

 

 

153

%

Depreciation/amortization

 

 

577

 

 

 

3

%

 

 

154

 

 

 

1

%

 

 

423

 

 

 

275

%

Total general & administrative expense

 

$

18,434

 

 

 

100

%

 

$

10,749

 

 

 

100

%

 

$

7,685

 

 

 

586

%

24


 

 

 

 

Nine

 

 

 

 

 

 

Nine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Months

Ended

 

 

% of

Expense

 

 

Months

Ended

 

 

% of

Expense

 

 

Increase (Decrease)

 

 

 

June 30, 2021

 

 

Category

 

 

June 30, 2020

 

 

Category

 

 

$

 

 

%

 

Salaries

 

$

8,411

 

 

 

19

%

 

$

9,747

 

 

 

26

%

 

$

(1,336

)

 

 

-14

%

Professional/outside services

 

 

4,199

 

 

 

10

%

 

 

5,519

 

 

 

15

%

 

 

(1,320

)

 

 

-24

%

Facilities related

 

 

2,127

 

 

 

5

%

 

 

1,657

 

 

 

4

%

 

 

470

 

 

 

28

%

Other G&A

 

 

4,326

 

 

 

10

%

 

 

2,531

 

 

 

6

%

 

 

1,795

 

 

 

71

%

Total general & administrative expense, excluding non-cash expense

 

$

19,063

 

 

 

44

%

 

$

19,454

 

 

 

51

%

 

$

(391

)

 

 

-2

%

Stock compensation

 

 

23,631

 

 

 

54

%

 

 

18,099

 

 

 

48

%

 

 

5,532

 

 

 

31

%

Depreciation/amortization

 

 

887

 

 

 

2

%

 

 

456

 

 

 

1

%

 

 

431

 

 

 

95

%

Total general & administrative expense

 

$

43,581

 

 

 

100

%

 

$

38,009

 

 

 

100

%

 

$

5,572

 

 

 

15

%

 

 

Salaries expense decreased by $63,000 from $2,633,000 during the three months ended June 30, 2020 to $2,570,000 during the current period. Salaries expense decreased by $1,336,000 from $9,747,000 during the nine months ended June 30, 2020 to $8,411,000 during the current period. The decrease of $1,336,000 during the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020 is primarily due to higher annual performance bonuses awarded in December 2019. We expect salaries expense to increase as our headcount continues to increase to support our expanding clinical pipeline.  

Professional/outside services include legal, accounting, consulting, patent expenses, business insurance expenses and other outside services retained by the Company. Professional/outside services expense decreased by $1,641,000 from $2,020,000 during the three months ended June 30, 2020 to $379,000 during the current period. Professional/outside services expense decreased by $1,320,000 from $5,519,000 during the nine months ended June 30, 2020 to $4,199,000 during the current period. The decrease in professional/outside services expense is primarily related to the timing of certain patent-related expenses.

Facilities-related expense increased by $164,000 from $446,000 during the three months ended June 30, 2020 to $610,000 during the current period. Facilities-related expense increased by $470,000 from $1,657,000 during the nine months ended June 30, 2020 to $2,127,000 during the current period. This category primarily includes rental costs for our corporate headquarters in Pasadena, California.  The increase in both periods was due to the additional space leased for our corporate headquarters to accommodate an increase in headcount.

Other G&A expense increased by $1,532,000 from $746,000 during the three months ended June 30, 2020 to $2,278,000 during the current period. Other G&A expense increased by $1,795,000 from $2,531,000 during the nine months ended June 30, 2020 to $4,326,000 during the current period. This category consists primarily of travel, communication and technology, office expenses, and franchise and property tax expenses.  The increase is due to an increase in headcount at the Company’s corporate headquarters.

Stock compensation expense, a non-cash expense, increased by $7,270,000 from $4,750,000 during the three months ended June 30, 2020 to $12,020,000 during the current period. Stock compensation expense, a non-cash expense, increased by $5,532,000 from $18,099,000 during the nine months ended June 30, 2020 to $23,631,000 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. We generally expect future stock compensation expense to increase as our headcount continues to increase to support our clinical pipeline.  

Depreciation and amortization expense, a noncash expense, increased by $423,000 from $154,000 during the three months ended June 30, 2020 to $577,000 during the current period. Depreciation and amortization expense, a noncash expense, increased by $431,000 from $456,000 during the nine months ended June 30, 2020 to $887,000 during the current period.  The increase is primarily related to amortization of leasehold improvements for our corporate headquarters.

Other Income/Expense

Other income/expense was income of $2,335,000 during the three months ended June 30, 2020 compared to income of $1,944,000 during the current period. Other income/expense was income of $6,920,000 during the nine months ended June 30, 2020 compared to income of $6,679,000 during the current period.  Other income is primarily related to interest income and realized and unrealized gain/loss on our marketable securities.

25


Liquidity and Capital Resources

Arrowhead has historically financed its operations through the sale of its equity securities and revenue from its collaboration agreements. Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure in the future.

At June 30, 2021, the Company had cash on hand of approximately $326.0 million as compared to $143.6 million at September 30, 2020.  Cash invested in short-term fixed income securities and marketable securities was $190.3 million at June 30, 2021, compared to $171.9 million at September 30, 2020.  Cash invested in long-term fixed income securities was $128.4 million at June 30, 2021, compared to $137.5 million at September 30, 2020. The Company also entered into an Open Market Sale Agreement (the “ATM agreement”) in August 2020, pursuant to which the Company may, from time to time, sell up to $250,000,000 in shares of the Company’s Common Stock through Jefferies LLC.  As of June 30, 2021, no shares have been issued under the ATM agreement. 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 nine months ended June 30, 2021 and 2020 is as follows:

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

(in thousands)

 

Cash Flow from:

 

 

 

 

 

 

 

 

Operating Activities

 

 

195,341

 

 

 

(84,541

)

Investing Activities

 

 

(23,433

)

 

 

(174,883

)

Financing Activities

 

 

10,490

 

 

 

256,943

 

Net Increase (decrease) in cash and cash equivalents

 

 

182,398

 

 

 

(2,481

)

Cash and cash equivalents at beginning of period

 

 

143,583

 

 

 

221,804

 

Cash and cash equivalents at end of period

 

 

325,981

 

 

 

219,323

 

 

During the nine months ended June 30, 2021, cash flow provided by operating activities was $195.3 million, which was primarily due to the $300 million payment received under the Takeda License Agreement and the $10 million milestone payment from Janssen for ARO-JNJ1, partially offset by ongoing expenses of the Company’s research and development programs and general and administrative expenses. Cash used in investing activities was $23.4 million, which was primarily related to the purchase of property and equipment of $15.4 million, partially offset by the net purchase of investments of $8.1 million. Cash provided by financing activities of $10.5 million was related to cash received from stock option exercises.

 

During the nine months ended June 30, 2020, the Company used $84.5 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 $174.9 million, which was primarily related to the purchase of fixed-income investments of $194.0 million and property and equipment of $10.1 million, partially offset by the maturity of $29.1 million of fixed-income securities.  Cash provided by financing activities of $256.9 million was driven by the Company’s securities financing in December 2019, which generated $250.5 million in net cash proceeds, as well as $6.5 million in cash received from stock option exercises.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

 

26


 

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, 2020.

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.

 

27


 

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. There have been no material developments in the legal proceedings that we disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the year ended September 30, 2020.  

ITEM 1A.

Risk Factors

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended September 30, 2020. 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, 2020, 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.

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

 

Form of Performance RSU Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)*

 

 

 

10.2

 

Form of Stock Option Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)*

 

 

 

10.3

 

Form of RSU Agreement (Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan)*

 

 

 

10.4

 

Collaboration and License Agreement by and between Arrowhead Pharmaceuticals, Inc. and Horizon Therapeutics Ireland DAC, dated June 18, 2021*†

 

 

 

31.1

 

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.INS

 

Inline XBRL Instance Document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document*

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document*

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document*

 

 

 

104

 

The cover page from this Quarterly Report on Form 10-Q, 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: August 5, 2021

 

 

ARROWHEAD PHARMACEUTICALS, INC.

 

 

 

 

 

By:

 

/s/ Kenneth A. Myszkowski

 

 

 

Kenneth A. Myszkowski

Chief Financial Officer

 

 

 

(Principal Financial Officer and Duly Authorized Officer)

 

30