Notes to Consolidated Financial Statements
(unaudited)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
General and Recent Developments
Arrowhead Pharmaceuticals, Inc. and its subsidiaries (referred to herein collectively as the “Company”) are primarily engaged in developing medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, the Company’s 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. The Company’s RNAi-based therapeutics may leverage this natural pathway of gene silencing to target and shut down specific disease-causing genes.
The following table presents the Company’s current pipeline:
| | | | | | | | | | | |
| Therapeutic Area | Name | Stage | Product Rights |
| Cardiometabolic | ARO-APOC3 | Two Phase 2b and one Phase 3 | Arrowhead |
| ARO-ANG3 | Two Phase 2b | Arrowhead |
| Olpasiran | Phase 3 | Amgen |
| Pulmonary | ARO-ENAC2 | Pre-Clinical | Arrowhead |
| ARO-RAGE | Phase 1/2 | Arrowhead |
| ARO-MUC5AC | Phase 1/2a | Arrowhead |
| ARO-MMP7 | Phase 1/2a | Arrowhead |
| Liver | ARO-HSD | Phase 1/2 | GSK |
| Fazirsiran | Phase 2 | Takeda and Arrowhead |
| JNJ-3989 | Phase 2 | Janssen |
| HZN-457 (formerly ARO-XDH) | Phase 1 | Horizon |
| ARO-C3 | Phase 1/2 | Arrowhead |
| JNJ-75220795 | Phase 1 | Janssen |
| Muscle | ARO-DUX4 | Pre-Clinical | Arrowhead |
The Company operates lab facilities in San Diego, California and Madison, Wisconsin, where its research and development activities, including the development of RNAi therapeutics, take place. The Company’s principal executive offices are located in Pasadena, California.
During the first quarter of fiscal 2023, the Company continued to develop and advance its pipeline and partnered candidates. Several key recent developments include:
•enrolled the first subject in a Phase 1 randomized, placebo-controlled trial to assess the safety tolerability, pharmacokinetics and pharmacodynamics of a development-stage medicine, HZN-457 (formerly ARO-XDH), which is out-licensed to Horizon, triggering a $15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023;
•enrolled the first subject in Amgen’s Phase 3 trial of Olpasiran, triggering a $25.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023;
•entered into a Royalty Purchase Agreement (the “Royalty Pharma Agreement”) with Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”) on November 9, 2022, pursuant to which Royalty Pharma paid $250.0 million upfront (See Note 11 — Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.”);
•announced Topline Results from SEQUOIA Phase 2 Study of Fazirsiran (formerly ARO-AAT) in Patients with Alpha-1 Antitrypsin Deficiency-Associated Liver Disease in which;
◦Fibrosis regression was observed in 50% of patients receiving Fazirsiran;
◦Median reductions of 94% of Z-AAT accumulation in the liver and mean reductions of 68% in histologic globule burden were observed;
◦Treatment emergent adverse events were generally well balanced between Fazirsiran and placebo groups;
◦Results were consistent with AROAAT-2002 open-label study previously published in The New England Journal of Medicine.
Consolidation and Basis of Presentation
The interim Consolidated Financial Statements include the accounts of Arrowhead Pharmaceuticals, Inc. and its subsidiaries (wholly-owned subsidiaries and a variable interest entity for which the Company is the primary beneficiary). Subsidiaries refer to Arrowhead Madison, Inc., Visirna Therapeutics, Inc. (“Visirna”), and Arrowhead Australia Pty Ltd. For subsidiaries in which the Company owns or is exposed to less than 100% of the economics, the Company records net loss attributable to noncontrolling interests in its consolidated statements of operations equal to the percentage of the economic or ownership interests retained in such entity by the respective noncontrolling party.
The interim Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The financial data of the Company included herein are unaudited. In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position at December 31, 2022 and the results of operations and cash flows for the periods presented. All intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation.
Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted from the accompanying interim consolidated financial statements and related notes. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended September 30, 2022 for more complete descriptions and discussions. Operating results and cash flows for the three months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023.
Liquidity
The Company’s primary sources of financing have been through the sale of its securities, revenue from its licensing and collaboration agreements and the sale of certain future royalties. Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure in the future, particularly as the Company’s pipeline of drug candidates and its headcount have both expanded significantly. Additionally, significant capital investment will be required as the Company’s pipeline matures into later stage clinical trials and as the Company plans to increase its internal manufacturing capabilities.
At December 31, 2022, the Company had $202.2 million in cash and cash equivalents (including $7.3 million in restricted cash), $299.6 million in short-term investments and $115.8 million in long-term investments to fund operations. During the three months ended December 31, 2022, the Company’s cash and cash equivalents and investments balance increased by $135.3 million which was primarily due to the $250.0 million upfront payment received from Royalty Pharma. See Note 11.
In total, the Company is eligible to receive up to $4.1 billion in developmental, regulatory and sales milestones, and may receive various royalties on net sales from its licensing and collaboration agreements, subject to the terms and conditions of those agreements. The revenue recognition for these collaboration agreements is discussed further in Note 2.
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 for the fiscal year ended September 30, 2022.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements that have significantly impacted this Quarterly Report on Form 10-Q, beyond those disclosed in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
NOTE 2. COLLABORATION AND LICENSE AGREEMENTS
Glaxosmithkline Intellectual Property (No. 3) Limited (“GSK”)
On November 22, 2021, GSK and the Company entered into an Exclusive License Agreement (the “GSK License Agreement”). Under the GSK License Agreement, GSK has received an exclusive license for ARO-HSD. The exclusive license is worldwide with the exception of greater China, for which the Company retained rights to develop and commercialize ARO-HSD. The Company has completed its Phase 1/2 study of ARO-HSD, and GSK is now wholly responsible for all clinical development and commercialization of ARO-HSD in its territory. Under the terms of the agreement, the Company has received an upfront payment of $120.0 million and is eligible for additional payments of $30.0 million at the start of a Phase 2 trial and $100.0 million upon achieving (i) a successful Phase 2 trial readout and (ii) the first patient dosed in a Phase 3 trial. Furthermore, should the Phase 3 trial read out positively, and the potential new medicine receives regulatory approval in major markets, the deal provides for commercial milestone payments to the Company of up to $190.0 million at first commercial sale, and up to $590.0 million in sales-related milestone payments. The Company is further eligible to receive tiered royalties on net product sales in a range of mid-teens to twenty percent.
At the inception of the GSK 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 responsibility to complete the Phase 1/2 study (the “GSK R&D Services”). Due to the specialized and unique nature of the GSK R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation. Beyond the GSK R&D Services, which are the responsibility of the Company, GSK will be responsible for managing future clinical development and commercialization in its territory.
The Company determined the initial transaction price totaled $120.0 million, including the upfront payment, which was collected in January 2022. The Company has excluded any future estimated milestones or royalties from this transaction price to date. The Company has allocated the total $120.0 million initial transaction price to its one distinct performance obligation for the ARO-HSD license and the associated GSK R&D Services. As the Company has completed its performance obligation related to this agreement, the upfront payment of $120.0 million was fully recognized as of September 30, 2022. There were no revenue recorded associated with the GSK License Agreement for the three months ended December 31, 2022 and 2021. There were no contract assets and liabilities recorded as of December 31, 2022.
Horizon Therapeutics Ireland DAC (“Horizon”)
On June 18, 2021, Horizon and the Company entered into a collaboration and license agreement (the “Horizon License Agreement”). Under the terms of the Horizon License Agreement, Horizon received a worldwide exclusive license for HZN-457, a clinical-stage medicine being developed by Horizon as a potential treatment for people with uncontrolled gout. The Company conducted all activities through the preclinical stages of development of, and Horizon is now wholly responsible for clinical development and commercialization of HZN-457. In July 2021, the Company received $40.0 million as an upfront payment and is eligible to receive up to $660.0 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.
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 HZN-457 (the “Horizon R&D Services”). Due to the specialized and unique nature of these Horizon R&D Services and their direct relationship with the license, the Company determined that these deliverables represented one distinct bundle and, thus, one performance obligation. Beyond the Horizon R&D Services, which are the responsibility of the Company, Horizon is responsible for managing future clinical development and commercialization of HZN-457.
The Company determined the initial transaction price totaled $40.0 million, including the upfront payment. The Company has excluded any future estimated milestones or royalties from this transaction price to date. The Company allocates the total $40.0 million initial transaction price to its one distinct performance obligation for the HZN-457 license and the associated Horizon R&D Services. Revenue is recognized on a straight-line basis over the estimated timeframe for completing the Horizon R&D Services. The Company determined that the straight-line basis was appropriate as its efforts will be expended evenly over the course of completing its performance obligation. Further, Horizon enrolled the first subject in December 2022 in a Phase 1 randomized, placebo-controlled trial to assess the safety, tolerability, pharmacokinetics and pharmacodynamics of HZN-457, triggering a $15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023.
Revenue for the three months ended December 31, 2022 and 2021 were $21.7 million and $6.7 million, respectively. There were $15.0 million in contract assets recorded as accounts receivable and $0 in contract liabilities recorded as deferred revenue as of December 31, 2022.
Takeda Pharmaceutical Company Limited (“Takeda”)
On October 7, 2020, Takeda and the Company entered into an Exclusive License and Co-Funding Agreement (the “Takeda License Agreement”). Under the Takeda License Agreement, Takeda and the Company will co-develop its Fazirsiran 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, Fazirsiran, if approved, will be co-commercialized under a 50/50 profit sharing structure. Outside the United States, Takeda will lead the global commercialization strategy and will receive an exclusive license to commercialize Fazirsiran, while the Company will be eligible to receive tiered royalties of 20% to 25% on net sales. In January 2021, the Company received $300.0 million as an upfront payment and is eligible to receive potential development, regulatory and commercial milestones of up to $595.0 million.
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 Fazirsiran 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 outside the United States. Within the United States, the Company will also participate in co-development and co-commercialization efforts and will co-fund these efforts with Takeda as part of the 50/50 profit sharing structure within the United States. The Company considers the collaborative activities, including the co-development and co-commercialization, to be a separate unit of account within Topic 808, and as such, these co-funding amounts are recorded as research and development expenses or general and administrative expenses, as appropriate.
The Company determined the initial transaction price totaled $300.0 million, which includes the upfront payment. The Company has excluded any future milestones or royalties from this transaction price to date. The Company has allocated the total $300.0 million initial transaction price to its one distinct performance obligation for the Fazirsiran license and the associated Takeda R&D Services. Revenue is recognized using a proportional performance method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). The Company recognized $16.3 million and $20.8 million in connection with these efforts for the three months ended December 31, 2022 and 2021, respectively. There were $0 of contract assets recorded as accounts receivable and $107.1 million of contract liabilities recorded as deferred revenue, of which $66.3 million was classified as current deferred revenue, as of December 31, 2022. The Company also recorded $9.8 million as accrued expenses as of December 31, 2022 that was primarily driven by co-development and co-commercialization activities.
Janssen Pharmaceuticals, Inc. (“Janssen”)
On October 3, 2018, Janssen, part of the Janssen Pharmaceutical Companies of Johnson & Johnson, and the Company entered into a License Agreement (the “Janssen License Agreement”) and a Research Collaboration and Option Agreement (the “Janssen Collaboration Agreement”). The Company also entered into a stock purchase agreement with JJDC, Inc. (“JJDC”), Johnson & Johnson's venture capital arm (the “JJDC Stock Purchase Agreement”). Under the Janssen License Agreement, Janssen has received a worldwide, exclusive license to the Company’s JNJ-3989 (ARO-HBV) program, the Company’s third-generation subcutaneously administered RNAi therapeutic candidate being developed as a potential therapy for patients with chronic hepatitis B virus infection. Beyond the Company’s Phase 1/2 study of JNJ-3989 (ARO-HBV), which the Company was responsible for completing, Janssen is wholly responsible for clinical development and commercialization of JNJ-3989 (ARO-HBV). Under the Janssen Collaboration Agreement, Janssen was able to select three new targets against which the Company would develop clinical candidates. These candidates were subject to certain restrictions and did not include candidates that already were in the Company’s pipeline. The Company was obligated to perform discovery, optimization and preclinical research and development, entirely funded by Janssen, which on its own or in combination with Janssen development work, would have been sufficient to allow the filing of a U.S. Investigational New Drug Application or equivalent, at which time Janssen would have the option to take an exclusive license. If the option was exercised, Janssen would have been wholly responsible for clinical development and commercialization of each optioned candidate. Under the terms of the agreements taken together, the Company has received $175.0 million as an upfront payment, $75.0 million in the form of an equity investment by JJDC in the Company’s common stock under the JJDC Stock Purchase Agreement, and milestone and option payments totaling $73.0 million, and the Company may receive up to $0.8 billion in development and sales milestone payments for the Janssen License Agreement, and up to $0.6 billion in development and sales milestone payments for the remaining target covered under the Janssen Collaboration Agreement. The Company is further eligible to receive tiered royalties on product sales up to mid-teens under the Janssen License
Agreement and up to low teens under the Janssen Collaboration Agreement. During 2022, Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement.
At the inception of the Janssen License Agreement and Janssen Collaboration Agreement, 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. The Company recognized this transaction price in its entirety as of September 30, 2021, as its performance obligations were substantially completed. Future milestones and royalties achieved will be recognized in their entirety when earned. There were no contract assets and liabilities recorded as of December 31, 2022.
The Company has conducted its discovery, optimization and preclinical research and development of JNJ-75220795 (ARO-JNJ1), ARO-JNJ2, and ARO-JNJ3 under the Janssen Collaboration Agreement. All costs and labor hours spent by the Company have been entirely funded by Janssen. Janssen’s option period expired unexercised for two of the three candidates (ARO-JNJ2 and ARO-JNJ3) under the Janssen Collaboration Agreement during 2022. In May 2021, Janssen exercised its option right for JNJ-75220795 (ARO-JNJ1), which resulted in a $10.0 million milestone payment to the Company. This $10.0 million milestone payment was recognized entirely as of September 30, 2021. There were no revenue recorded associated with the Company’s agreement with Janssen for the three months ended December 31, 2022 and 2021. There were no contract assets and liabilities recorded as of December 31, 2022.
Amgen Inc. (“Amgen”)
On September 28, 2016, Amgen and the Company entered into two collaboration and license agreements and a common stock purchase agreement. Under the Second Collaboration and License Agreement (the “Olpasiran Agreement”), Amgen received a worldwide, exclusive license to the Company’s novel RNAi Olpasiran 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 first collaboration and license agreement (the “First Collaboration and License Agreement” or the “ARO-AMG1 Agreement”), Amgen received an option to a worldwide, exclusive license to ARO-AMG1, an RNAi therapy for an undisclosed genetically validated cardiovascular target. Under both agreements, Amgen is wholly responsible for clinical development and commercialization.
Under the Olpasiran Agreement and the ARO-AMG1 Agreement, 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 has substantially completed its performance obligations under the Olpasiran Agreement and the ARO-AMG1 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. In July 2020, Amgen initiated a Phase 2 clinical study of Olpasiran, which resulted in a $20.0 million milestone payment to the Company. In December 2022, Amgen enrolled the first subject in its Phase 3 trial of Olpasiran, which triggered a $25.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023. Revenue for the three months ended December 31, 2022 and 2021 were $25.0 million and $0, respectively. There were $25.0 million in contract assets recorded as accounts receivable and $0 in contract liabilities recorded as deferred revenue as of December 31, 2022.
Further, in November 2022, Royalty Pharma and the Company entered into the Royalty Pharma Agreement. In consideration for the payments under the Royalty Pharma Agreement, Royalty Pharma is entitled to receive all royalties otherwise payable by Amgen to the Company under the Olpasiran Agreement. The Company remains eligible to receive up to an additional $375.0 million in remaining development, regulatory and sales milestone payments payable by Amgen under the Olpasiran Agreement. See Note 11.
Joint Venture and License Agreement with Visirna Therapeutics, Inc. (“Visirna”)
On April 25, 2022, Visirna and the Company entered into a License Agreement (the “Visirna License Agreement”), pursuant to which Visirna received an exclusive license to develop, manufacture and commercialize four of the Company’s RNAi-based investigational cardiometabolic medicines in Greater China (including the People’s Republic of China, Hong Kong, Macau and Taiwan). Pursuant to a Share Purchase Agreement entered into simultaneously with the Visirna License Agreement (the “Visirna SPA”), the Company acquired a majority stake in Visirna (after accounting for shares reserved for Visirna’s employee stock ownership plan) as partial consideration for the Visirna License Agreement. Under the Visirna SPA, entities affiliated with Vivo Capital also acquired a minority stake in Visirna in exchange for $60.0 million in upfront capital to support the operations of Visirna. As further consideration under the Visirna License Agreement, the Company is also eligible to receive potential royalties on commercial sales.
During the three months ended December 31, 2022, the Company performed manufacturing and development work pursuant to a Clinical Supply Agreement between the parties contemplated by the Visirna License Agreement. The Company received $0.7 million as consideration for this manufacturing and development work, and there were no contract assets and liabilities recorded as of December 31, 2022.
NOTE 3. PROPERTY AND EQUIPMENT
The following table summarizes the Company’s major classes of property and equipment:
| | | | | | | | | | | |
| December 31, 2022 | | September 30, 2022 |
| (in thousands) |
| Computers, software, office equipment and furniture | $ | 2,182 | | | $ | 2,182 | |
| Land | 2,996 | | | 2,996 | |
| Research equipment | 43,739 | | | 38,283 | |
| Leasehold improvements | 42,017 | | | 42,017 | |
| Construction in progress | 90,215 | | | 56,373 | |
| 181,149 | | | 141,851 | |
| Less: Accumulated depreciation and amortization | (33,835) | | | (31,554) | |
| Property and equipment, net | $ | 147,314 | | | $ | 110,297 | |
Depreciation and amortization expense for property and equipment for the three months ended December 31, 2022 and 2021 was $2.3 million and $2.1 million, respectively.
The increase in the construction in progress during the three months ended December 31, 2022 was mainly due to the continuing developments of manufacturing, laboratory and office facilities in Verona, Wisconsin as well as a new laboratory and office facility in San Diego, California. See Note 7.
NOTE 4. INVESTMENTS
The Company’s investments consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| (In thousands) |
| Adjusted Basis | | Gross
Unrealized Gains | | Gross
Unrealized Losses | | Fair Value |
| | | | | | | |
| Short-term investments (due within one year) | | | | | | | |
| Held to maturity debt securities | $ | 299,582 | | | $ | — | | | $ | (2,644) | | | $ | 296,938 | |
| Held to maturity certificate of deposit | — | | | — | | | — | | | — | |
| Total short-term investments | $ | 299,582 | | | $ | — | | | $ | (2,644) | | | $ | 296,938 | |
| | | | | | | |
| Long-term investments (Due within one through three years) | | | | | | | |
| Held to maturity debt securities | $ | 115,774 | | | $ | — | | | $ | (4,440) | | | $ | 111,334 | |
| Total long-term investments | $ | 115,774 | | | $ | — | | | $ | (4,440) | | | $ | 111,334 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
| (In thousands) |
| Adjusted Basis | | Gross
Unrealized Gains | | Gross
Unrealized Losses | | Fair Value |
| | | | | | | |
| Short-term investments (due within one year) | | | | | | | |
| Held to maturity debt securities | $ | 218,391 | | | $ | — | | | $ | (3,661) | | | $ | 214,730 | |
| Held to maturity certificate of deposit | 50,000 | | | — | | | — | | | 50,000 | |
| Total short-term investments | $ | 268,391 | | | $ | — | | | $ | (3,661) | | | $ | 264,730 | |
| | | | | | | |
| Long-term investments (Due within one through three years) | | | | | | | |
| Held to maturity debt securities | $ | 105,872 | | | $ | — | | | $ | (5,569) | | | $ | 100,303 | |
| Total long-term investments | $ | 105,872 | | | $ | — | | | $ | (5,569) | | | $ | 100,303 | |
| | | | | | | |
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 following table presents the components of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Impairment | | Net Carrying Amount | | Useful Lives |
| (amounts in thousands) | | (in years) |
| As of December 31, 2022 | | | | | | | | | |
| Patents | $ | 21,728 | | | $ | 12,158 | | | $ | — | | | $ | 9,570 | | | 14 |
| License | 3,129 | | | 1,162 | | | — | | | 1,967 | | | 21 |
| Total intangible assets, net | $ | 24,857 | | | $ | 13,320 | | | $ | — | | | $ | 11,537 | | | |
| | | | | | | | | |
| As of September 30, 2022 | | | | | | | | | |
| Patents | $ | 21,728 | | | $ | 11,770 | | | $ | — | | | $ | 9,958 | | | 14 |
| License | 3,129 | | | 1,125 | | | — | | | 2,004 | | | 21 |
| Total intangible assets, net | $ | 24,857 | | | $ | 12,895 | | | $ | — | | | $ | 11,962 | | | |
Intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during the three months ended December 31, 2022 and 2021.
Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. Intangible assets amortization expense for each of the three months ended December 31, 2022 and 2021 was $0.4 million. None of the intangible assets with definite useful lives are anticipated to have a residual value.
The following table presents the estimated future amortization expense related to intangible assets as of December 31, 2022:
| | | | | | | | |
| | Amortization Expense |
| Year Ending September 30, | | (in thousands) |
| 2023 (remainder) | | $ | 1,275 | |
| 2024 | | 1,700 | |
| 2025 | | 1,700 | |
| 2026 | | 1,700 | |
| 2027 | | 1,700 | |
| Thereafter | | 3,462 | |
| Total | | $ | 11,537 | |
| | |
NOTE 6. STOCKHOLDERS’ EQUITY
The following table summarizes the Company’s shares of common stock and preferred stock:
| | | | | | | | | | | | | | |
| | Shares |
| Par Value | Authorized | Issued | Outstanding |
| | (in thousands) |
| As of December 31, 2022 | | | | |
| Common stock | $ | 0.001 | | 145,000 | | 106,140 | | 106,140 | |
| Preferred stock | $ | 0.001 | | 5,000 | | — | | — | |
| | | | |
| As of September 30, 2022 | | | | |
| Common stock | $ | 0.001 | | 145,000 | | 105,960 | | 105,960 | |
| Preferred stock | $ | 0.001 | | 5,000 | | — | | — | |
13,769,984 and 14,000,392 shares of common stock as of December 31, 2022 and September 30, 2022, respectively, were reserved for issuance upon exercise of options and vesting of restricted stock units granted or available for grant under the Company’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.
On December 2, 2022, the Company entered into an open market sale agreement (the “Open Market Sale Agreement”), pursuant to which the Company may, from time to time, sell up to $250,000,000 in shares of the Company’s common stock through Jefferies LLC, acting as the sales agent and/or principal, in an at-the-market offering (“ATM Offering”). The Company is not required to sell shares under the Open Market Sale Agreement. The Company will pay Jefferies LLC a commission of up to 3.0% of the aggregate gross proceeds received from all sales of the common stock under the Open Market Sale Agreement. Unless otherwise terminated, the ATM Offering shall terminate upon the earlier of (i) the sale of all shares of common stock subject to the Sales Agreement and (ii) the termination of the Sales Agreement as permitted therein. The Company and Jefferies may each terminate the Open Market Sale Agreement at any time upon prior notice. As of December 31, 2022, no shares have been issued under the Open Market Sale Agreement.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company may be subject to various claims and legal proceedings in the ordinary course of business. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount is reasonably estimable, the Company will accrue a liability for the estimated loss. There were no contingent liabilities recorded as of December 31, 2022.
Commitments
On December 20, 2021, the Company completed a purchase of 13 acres of land in the Verona Technology Park in Verona, Wisconsin, which is being developed into an approximately 160,000 square foot drug manufacturing facility and an approximately 140,000 square foot laboratory and office facility which will support the Company’s process development and analytical activities. The Company intends to invest between $200.0 million and $260.0 million into the build-out of the facilities. As part of this acquisition, the Company entered into a development agreement with the City of Verona to construct certain infrastructure improvements within the tax incremental district and will be reimbursed up to $16.0 million by the City of Verona by future tax increment revenue generated from the developed property. The total amount of funding that the City of Verona will pay under the Tax Incremental Financing program is not guaranteed and will depend on future tax revenues generated from the developed property. The Company will also receive up to $2.5 million of refundable Wisconsin state income tax credits from the Wisconsin Economic Development Corporation (WEDC) as incentives to invest in the local community and create new jobs.
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 it may develop using these licensed technologies. These agreements and other similar agreements often require milestone and royalty payments. Milestone payments, for example, may be required as the research and development process progresses through various stages of development, such as when clinical candidates enter or progress through clinical trials, upon NDA and/or certain sales level milestones. During the three months ended December 31, 2022 and 2021, the Company did not reach any milestones.
NOTE 8. LEASES
On November 19, 2021, the Company entered into a new 15-year lease for approximately 144,000 square feet of office and research and development laboratory space under construction in San Diego, California. This facility will replace the Company’s current office and research facility sublease located in San Diego, California. The increased capacity of this new facility compared to the Company’s current research facility in San Diego will accommodate increased personnel for its expanding pipeline of current and future drug candidates. The estimated rent commencement date for the new lease is in April 2023 after construction and leasehold improvements have been completed. The lease payments, which begin on the rent commencement date, will be approximately $119.0 million over the initial 15-year term. The Company also estimates payments for operating expenses to be approximately $3.0 million for the first year of the lease, and these payments will continue throughout the initial 15-year term. The Company expects to pay approximately $31.0 million for leasehold improvements, net of tenant improvement allowances. Pursuant to the lease, within twelve months of the expiration of the initial 15-year term, the Company has the option to extend the lease for up to one additional ten-year term, with certain annual increases in base rent.
Other Significant Leases
Pasadena, California: The Company leases office space located at 177 Colorado Blvd for its corporate headquarters from 177 Colorado Owner, LLC. The lease began on September 30, 2019 and expires on April 30, 2027. The lease contains an option to renew for one term of five years. On October 23, 2020, the Company entered into a lease expansion to add an additional approximately 24,000 square feet of office with a lease expiration date of April 30, 2027.
San Diego, California: The Company subleased space from Halozyme, Inc. for additional research and development facility in San Diego, California. The term of this sublease commenced on April 1, 2020 and ended on January 14, 2023. On December 23, 2022, the Company entered into a new six-month lease agreement with 11404 & 11408 Sorrento Valley Owner (DE) LLC, effective January 15, 2023. The lease will end on July 15, 2023.
Madison, Wisconsin: The Company leases space for office and laboratory facilities, which expires on September 30, 2031. The lease contains options to renew for two terms of five years. After accounting for additional rental square feet added pursuant to amendments to the lease agreement in 2019 and 2020, the Company currently leases a total of 111,000 square feet.
The components of lease assets and liabilities along with their classification on the Company’s consolidated balance sheets were as follows:
| | | | | | | | | | | | | | | | | |
| Lease Assets and Liabilities | Classification | | December 31, 2022 | | September 30, 2022 |
| | | (in thousands) |
| | | | | |
| Operating lease assets | Right-of-use assets | | $ | 41,655 | | | $ | 58,291 | |
| | | | | |
| Current operating lease liabilities | Lease liabilities | | 2,664 | | | 2,776 | |
| Non-current operating lease liabilities | Lease liabilities, net of current portion | | 79,470 | | | 78,800 | |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| Lease Cost | Classification | | 2022 | | 2021 |
| | | (in thousands) |
| | | | | |
| Operating lease cost | Research and development | | $ | 2,069 | | | $ | 878 | |
| General and administrative expense | | 533 | | | 420 | |
| | | | | |
| Variable lease cost | Research and development | | 210 | | | 158 | |
| General and administrative expense | | — | | | — | |
| | | | | |
| Total | | | $ | 2,812 | | | $ | 1,456 | |
Variable lease cost primarily related to operating expenses associated with the Company’s operating leases. There was $0.1 million and $0 short-term lease cost during the three months ended December 31, 2022, and 2021, respectively.
The following table presents payments of operating lease liabilities on an undiscounted basis as of December 31,
2022:
| | | | | |
| Year | Amounts |
| (in thousands) |
| 2023 (remainder of fiscal year) | $ | 4,470 | |
| 2024 | 8,094 | |
| 2025 | 11,800 | |
| 2026 | 12,138 | |
| 2027 | 11,297 | |
| 2028 and thereafter | 102,813 | |
| Total | $ | 150,612 | |
| Less imputed interest | (68,478) | |
| Total operating lease liabilities (includes current portion) | $ | 82,134 | |
Supplemental cash flow and other information related to leases was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, |
| | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases (in thousands) | | $ | 1,331 | | | $ | 1,023 | |
| | | | |
| Weighted-average remaining lease term (in years) | | 6.9 | | 7.8 |
| Weighted-average discount rate | | 8.5 | % | | 8.5 | % |
NOTE 9. STOCK-BASED COMPENSATION
The Company has three plans that provide for equity-based compensation. Under the 2004 Equity Incentive Plan (the “2004 Plan”) and 2013 Incentive Plan (the “2013 Plan”), 175,083 and 3,991,304 shares, respectively, of the Company’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 as of December 31, 2022.
On March 18, 2021, the Company’s Board of Directors approved the Arrowhead Pharmaceuticals, Inc. 2021 Incentive Plan (the “2021 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 the Company’s common stock. The maximum number of shares authorized under the 2021 Plan will be (i) reduced by any shares subject to awards made under the 2013 Plan after January 1, 2021, and (ii) increased by any shares subject to outstanding awards under the 2013 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 December 31, 2022, the total number of shares reserved for issuance under the 2021 Incentive Plan was 7,155,527 shares, which includes 136,972 shares that were forfeited under the 2013 Plan.
In addition, there were 762,150 shares reserved for options and 739,625 shares reserved for restricted stock units issued as inducement grants to new employees granted outside of the Company’s equity-based compensation plans under Rule 5635(c)(4) of the Nasdaq Listing Rules.
The following table presents a summary of awards outstanding:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| 2004 Plan | | 2013 Plan | | 2021 Plan | | Inducement Awards | | Total |
| Granted and outstanding awards: | | | | | | | | | |
| Options | 175,083 | | | 1,685,543 | | | 3,000 | | | 762,150 | | | 2,625,776 | |
| Restricted stock units | — | | | 2,305,761 | | | 918,795 | | | 739,625 | | | 3,964,181 | |
| Total | 175,083 | | | 3,991,304 | | | 921,795 | | | 1,501,775 | | | 6,589,957 | |
Stock Option Awards
The following table presents a summary of the stock option activity for the three months ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted-
Average
Exercise
Price
Per Share | | Weighted-
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
Outstanding at September 30, 2022 | 2,721,384 | | $ | 20.73 | | | | | |
| Granted | — | | — | | | | | |
| Cancelled or expired | (13,875) | | 45.57 | | | | | |
| Exercised | (81,733) | | 7.04 | | | | | |
Outstanding at December 31, 2022 | 2,625,776 | | $ | 21.02 | | | 4.7 | | $ | 61,867,396 | |
Exercisable at December 31, 2022 | 2,346,710 | | $ | 17.83 | | | 4.4 | | $ | 60,525,256 | |
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the Company’s closing stock price and the stock option exercise price) that would have been received by the stock option holders had all stock options been exercised on December 31, 2022. The total intrinsic value of the options exercised during the three months ended December 31, 2022 and 2021 was $2.3 million and $12.5 million, respectively.
Stock-based compensation expense related to stock options oustanding for the three months ended December 31, 2022 and 2021, was $2.4 million and $3.0 million, respectively.
As of December 31, 2022, the pre-tax compensation expense for all outstanding unvested stock options in the amount of $9.5 million will be recognized in the Company’s results of operations over a weighted average period of 1.3 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, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. No options were granted during the three months ended December 31, 2022 and 2021.
Restricted Stock Units
Restricted stock units (“RSUs”), including market-based, time-based and performance-based awards, have been granted under the Company’s 2013 and 2021 Plans and as inducements grants granted outside of the Company’s equity-based compensation plans. 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
Per Share |
Outstanding at September 30, 2022 | 4,069,431 | | $ | 62.96 | |
| Granted | 18,875 | | 31.77 | |
| Vested | (98,250) | | 51.70 | |
| Forfeited | (25,875) | | 44.70 | |
Outstanding at December 31, 2022 | 3,964,181 | | $ | 63.31 | |
The fair value of RSUs was determined based on the closing price of the Company’s common stock on the grant date, with consideration given to the probability of achieving service and/or performance conditions for awards.
For the three months ended December 31, 2022 and 2021, the Company recorded stock-based compensation expense of $17.0 million and $21.5 million, respectively, related to shares of RSUs. As of December 31, 2022, there was $128.3 million of total unrecognized compensation cost related to RSUs that is expected to be recognized over a weighted-average period of 2.2 years.
NOTE 10. FAIR VALUE MEASUREMENTS
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date.
Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair values and the level of market price observability, as follows:
Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs are other than quoted prices in active markets, which are based on the following:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in non-active markets; or
• Either directly or indirectly observable inputs as of the reporting date.
Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. At December 31, 2022 and September 30, 2022, the Company did not have any financial assets or financial liabilities based on Level 3 measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
| | | | | | | |
| U.S. government bonds | $ | 27,423 | | | $ | — | | | $ | — | | | $ | 27,423 | |
| Commercial notes | — | | | 104,311 | | | — | | | 104,311 | |
| Corporate debt securities | — | | | 319,690 | | | — | | | 319,690 | |
| Certificate of deposits | — | | | — | | | — | | | — | |
| Money market instruments | 82,924 | | | — | | | — | | | 82,924 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in thousands) |
| | | | | | | |
| U.S. government bonds | $ | 1,973 | | | $ | — | | | $ | — | | | $ | 1,973 | |
| Commercial notes | — | | | 41,727 | | | — | | | 41,727 | |
| Corporate debt securities | — | | | 271,333 | | | — | | | 271,333 | |
| Certificate of deposits | 50,000 | | | — | | | — | | | 50,000 | |
| Money market instruments | 39,262 | | | — | | | — | | | 39,262 | |
NOTE 11. LIABILITY RELATED TO THE SALE OF FUTURE ROYALTIES
On November 9, 2022, the Company and Royalty Pharma entered into the Royalty Pharma Agreement, pursuant to which Royalty Pharma agreed to pay up to $410.0 million in cash to the Company in consideration for the Company’s future royalty interest in Olpasiran, a small interfering RNA (siRNA) originally developed by the Company and licensed to Amgen in 2016 under the Olpasiran Agreement.
Pursuant to the Royalty Pharma Agreement, Royalty Pharma paid $250.0 million upfront and agreed to pay up to an additional $160.0 million in aggregate one-time milestone payments due if and when the following milestone events occur: (i) $50.0 million on completion of enrollment in the planned OCEAN Phase 3 clinical trial for Olpasiran, (ii) $50.0 million upon receipt of FDA approval of Olpasiran for an approved indication (reduction in the risk of myocardial infarction, urgent coronary revascularization, or coronary heart disease death in adults with established cardiovascular disease and elevated Lp(a)), and (iii) $60.0 million upon Royalty Pharma’s receipt of at least $70.0 million of royalty payments under the Royalty Pharma Agreement in any single calendar year.
In consideration for the payment of the foregoing amounts under the Royalty Pharma Agreement, Royalty Pharma is entitled to receive all royalties otherwise payable by Amgen to the Company under the Olpasiran Agreement. The Company remains eligible to receive any milestone payments potentially payable by Amgen under the Olpasiran Agreement.
The Company has evaluated the terms of the Royalty Pharma Agreement and concluded in accordance with the relevant accounting guidance that the Company accounted for the transaction as debt and the funding of $250.0 million from Royalty Pharma was recorded as a liability related to the sale of future royalties on its consolidated balance sheets. The Company is not obligated to repay this upfront funding received under the Royalty Pharma Agreement. This liability is amortized over the expected repayment term using an effective interest rate method. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement. The interest rate may vary during the term of the agreement depending on a number of factors, including the amount and timing of forecasted net revenues which affects the repayment timing and ultimate amount of repayment. The Company will evaluate the effective interest rate quarterly based on its current revenue forecasts utilizing the prospective method. For the three months ended December 31, 2022, the Company recognized non-cash interest expense of $2.8 million on the consolidated statements of operations and comprehensive loss.